Although revenue is expected to grow on the back of robust demand for bottled water, Spritzer 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 of its average 5-year forward PE (see Figure 1). 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 TP of RM2.08 based on 13x FY24F EPS.

• 3QFY23 results recap. Spritzer’s 3QFY23 revenue grew by 10.8% YoY due to an increase in bottled water sales and higher ASP. The group reported its strongest quarterly profit yet at RM17m (+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 4-year CAGR of 5.9% to USD289.4m 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 c.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 RM36m as capex to install 2 new lines in Taiping and Yong Peng to boost its annual capacity to 1.2bn litres from 1bn litres. We understand that the new mineral water line in Taiping has started commissioning while the new line in Yong Peng will commission by 1QCY24 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 USD, we believe that the weaker RM will offset the positive impact from lower 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.

Source: PublicInvest Research - 24 Jan 2024