ALTHOUGH revenue is expected to grow on the back of robust demand for bottled water, Spritzer Bhd is likely to chalk lower earnings growth ahead due to weaker margin.
This is mainly due to higher raw material cost as a result of a weaker ringgit as well as higher logistic costs. We believe the recent run up in its share price has already priced in the positive outlook of stronger demand for bottled water. We are of the view that its stock is currently trading at a premium, at +1SD (standard deviation) of its average five-year forward price-to-earnings ratio (PE). As share price has increased by 24% since our upgrade in November 2023, we downgrade our call on Spritzer to 'Neutral' from 'Outperform' with an unchanged target price (TP) of RM2.08 based on 13x financial year 2024 (FY24F) earnings per share (EPS).
Third quarter of 2023 (3Q23) results recap. Spritzer's 3Q23 revenue grew by 10.8% year-onyear (YoY) due to an increase in bottled water sales and higher average selling price (ASP).
The group reported its strongest quarterly profit yet at RM17 million (+49% YoY), on better product mix, economies of scale as well as lower raw material costs.
Bottled water demand still robust. According to data from Statista, Malaysia's bottled water industry is expected to grow at a four-year CAGR of 5.9% to US$289.4 million (RM1.34 billion) by 2027. As such, we believe that Spritzer will continue to benefit from the growing trend, given its position as the market leader in Malaysia's bottled water industry as it accounts for around 45% of the market share. Furthermore, the recovery in economic and tourism activities should lead to higher consumption of bottled water.
Capacity expansion. The group has earmarked RM36 million as capital expenditure (capex) to install two new lines in Taiping, Perak, and Yong Peng, Johor, to boost its annual capacity to 1.2 billion litres from one billion litres. We understand that the new mineral water line in Taiping has started commissioning while the new line in Yong Peng will commission by 1Q24 which should help reduce logistic costs to Singapore. The group is looking to grow its market share in Singapore which was underpenetrated previously due to high logistic costs.
Slower earnings growth.
While the group is poised to benefit from the recovery in economic and tourism activities, we are expecting the group to post slower earnings growth in FY24F due to the high base effect as well as an increase in logistics and resin costs.
As resin is usually quoted in US dollar, we believe that the weaker ringgit will offset the positive impact from lower polyethylene terephthalate (PET) resin cost. In addition, we are not expecting Spritzer's China operations to breakeven in FY24F, given the intensive competition among the local players and high logistic costs.