KUALA LUMPUR (June 25): Kenanga Research lowered its rating of Spritzer Bhd to "market perform" at RM2 with a reduced target price (TP) of RM2.10 (from RM2.30) premised on an unchanged 16 times price-earnings ratio (PER) for the financial year ending Dec 31, 2020 (FY20) and anticipations of a weaker second quarter due to the Covid-19 outbreak.

In a note today, Kenanga analyst Nikki Thang said Spritzer’s earnings for the first quarter ended March 31, 2020 (1QFY20) were RM8.8 million, a 14% increase year-on-year (y-o-y), with no dividend announced. These remained within the research house’s expectations.

“Its 1QFY20 revenue and net profit both saw a jump, 7% and 35% respectively, largely boosted by greater bottled water demand and more favourable raw material costs, for instance, for PET resin.”

However, “against a backdrop of the ongoing Covid-19 outbreak, the group will likely suffer a weaker subsequent quarter. This is because bottled water consumption, which we believe is inversely correlated with a surge in in-home consumption, could be badly hit by the movement restrictions and a significant fall in retail footfall,” Thang added.

Meanwhile, persistent weakness in PET resin prices which take up about 35% of the cost of goods sold (COGS) should help to partially mitigate the aforesaid demerits by keeping manufacturing margins fairly steady in the near term, the note explained.

“Spritzer’s trading segment in China could record narrower losses for this financial year as the Covid-19 impact was mostly limited to 1QFY20.”

Kenanga Research revised Spritzer's FY20 and FY21 earnings estimates downwards by 7.8% and 10.7% respectively, taking into account weaker sales amid the Covid-19 outbreak. 

The research house maintained its dividend payout assumption of about 30% for now as Spritzer’s balance sheet remained healthy with a net cash pile of about RM17.4 million.

“In view of the clouded near-term prospects amid the virus outbreak, we believe the group’s positives — its long-term resiliency and healthy balance sheet — may have been fully priced in at this juncture, limiting its near-term upside potential,” said Thang.

Kenanga Research noted that stronger/poorer-than-expected sales and higher/lower-than-expected cost exposure are risks to its call.

Spritzer closed at RM2 yesterday, with a market capitalisation of RM419.94 million. It saw 3.2 million shares traded.