Spritzer's future backed by growing export sales and better output and efficiency

PETALING JAYA: Kenanga Research has initiated coverage on Spritzer Bhd citing future earnings backed by growing export sales, and investments in production and warehousing capabilities that should improve output and efficiency.

At the same time the group's leading market position is expected to sustain, given the resilient demand for the group's products.

On Thursday, Spritzer announced that it would raise RM63.8m for expansion of warehouse facilities in Taiping, by issuing new shares to Tasik Puncak Holdings Ltd. The exercise will make Tasik Puncak a substantial shareholder, with a 13.04% interest.

On Spritzer's growing international footprint, the research house said the group had ventured into the China and UK markets as a means of expanding its export market base. The move could potentially serve as a buffer against the weak domestic market which has been undermined by poor consumer spending post-Goods & Services Tax implementation and unfavourable forex.

"While operations in China are expected to incur high gestation costs in way of high marketing expenses against the heavy competition, effective initiatives could yield promising prospects given the much larger population base and spending ability, especially in the more developed
cities. We do not anticipate a significant shift in forex exposure in the short term as Singapore remains the largest export market (50%) at present," said Kenanga.

For the next three years, it said the group aims to invest RM60 million-RM80 million to increase the automation of its production lines and key warehousing capabilities.

It added that management aims to expand its production capacity by 20%. The move should improve economies of scale and subsequently lead to margins expansion. The added capacity could also allow for more aggressive trading of products in China in the near future. Currently, the group has a total production capacity of 650 million litres per annum with an utilisation rate of 70%.

Kenanga said the group is a leading player in the domestic bottled water market with an estimated 40% share. Backed by three key product brands (Spritzer, Cactus, Summer) with different price ranges, the group is able to tap into the various consumer segments with different spending habits to spread and sustain its market presence. In addition, the exclusive licensing of the group's key water well locations make it difficult for new entrants to compete in the market.

"We expect FY17 to close with lower earnings at RM23.0 million (-5%) despite flattish sales of RM319.4 million against RM318.5 million in CY16, due to gestation cost from China and higher raw material prices. FY18 is expected to perform better with stronger sales at RM333.2 million (+4%) driven by higher export volume and product price increase of 5% to support local sales margins. Net earnings could potentially record at RM30.3 million (+31%) on the back of higher margins in lieu of the said price increase and cost savings from higher production efficiency."

It initiated coverage on Spritzer with a market perform call and target price of RM2.20. The company's stock closed up nine sen at RM2.33, with some 86,000 shares changing hands last Thursday.

"We believe the resilience of group's products and leading market share could sustain the group's performance in the challenging operating environment."