Spritzer Bhd
(Sept 26, RM2.28)
Maintain neutral with an unchanged target price (TP) of RM2.27: To recall, Spritzer Bhd’s first half of 2018 (1HFY18) earnings rose by 32.7% year-on-year (y-o-y) to RM13.5 million. This is in view of the increase in the volume of bottled water sold locally and lower advertising and promotion cost incurred in China. For 2HFY18, we expect earnings to be weaker mainly due to the rising cost of sales. Nonetheless, this will be partially mitigated by the narrowing loss from its China operation, and continued resilient domestic performance.

Approximately 70% of Spritzer’s cost of sales are in packaging. Breaking this down further, about 50% of packaging cost is made up of polyethylene terephthalate (PET) resin cost. We gathered that PET resin price has spiked by 24% y-o-y or RM1,000 per tonne in line with the uptrend in oil prices and weakening ringgit. Due to the aforementioned factors, management is anticipating to increase product prices by 5%.

We expect the operating loss from its China operation to narrow further in financial year ending 2018 (FY18) from RM10 million in FY17. Note that as at 1HFY18, the loss reduced to RM2 million. To recall, the operating loss recorded for FY17 was mainly impacted by costly advertising strategies. Previously, the group focused on renting space in retail outlets to display its products. Management has since revamped its marketing strategies to engage directly with end consumers.

Despite the expectation of a price increase, we believe that the sales growth will remain at high single digits. This is premised on the expectation that Spritzer’s competitors will raise their prices as well to account for higher PET resin cost. In addition, we view that Spritzer’s strategy of manufacturing its own PET preform, bottles and caps help to keep cost at bay as compared with its peers. With economies of scale, it is also able to maintain a healthy profit margin.

No change to our earnings estimates as our forecast is within expectations.

Our TP remains unchanged at RM2.27 per share. This is based on pegging FY19 earnings per share of 13 sen at price-earnings ratio of 17.5 times.

We favour Spritzer’s strong brand equity in the local market, which has been instrumental in sustaining its earnings performance. However, in the near term, we are expecting a decline in 2HFY18 forecast earnings in view of the rising PET resin cost. Management guided that there is a possibility of passing part of the cost to consumers. We view that this could negatively affect the volume of bottles sold. Meanwhile, we expect that the China operation would still be loss-making. Nonetheless, we believe the loss will gradually reduce as the group’s revamped its marketing strategy to be more consumer-centric. Given the lack of positive rerating catalyst, we are reiterating our “neutral” recommendation on Spritzer. — MIDF Research, Sept 26