Valuation / Recommendation

We have a SUBSCRIBE recommendation on Life Water Berhad with an FV of RM0.74 based on 11x FY25F EPS, translating to 14% upside to the IPO price. Our target PE is at a slight discount to the valuation of its closest peer (13x of Spritzer Bhd), given Life Water’s smaller market share. We like Life Water for its strong position in the Sabah market, well-established distribution network, and opportunistic expansion into the Sarawak market.

Investment Highlights

Beverage powerhouse in Sabah. Life Water holds 11% of the market share in Malaysia’s bottled water sector and is likely the largest producer in Sabah. With a customer base exceeding 3,460 and a remarkable production CAGR of 17.4%, the company increased its output from 167.6m bottles in FY21 to 271.2m in FY24. This growth has driven a 3-year revenue CAGR of 17.2%, reaching RM166.5m in FY24. Life Water’s success is further supported by a wide distribution network of over 4,020 touchpoints. This extensive reach ensures that its products are consistently available to customers in both bustling urban centers and more rural areas in Sabah. As Sabah's population and household incomes continue to rise, the company is well-positioned to capture the growing demand through its expanding distribution network.

Expanding footprint to neighbouring markets. Life Water is extending its reach beyond Sabah, targeting Sarawak, Labuan, and Brunei as key growth areas. With an initial focus on Sarawak, the company plans to partner with established local distributors in regions like Limbang and Lawas. This approach allows the company to enter these markets with minimised capital investment by leveraging existing infrastructure. The combined population of Sarawak and Brunei is approximately 2.9m, indicating a new sizeable potential market that Life Water can tap into.

Capacity expansion for higher volume. Life Water is doubling its production capacity by 2027 through a strategic expansion plan funded by internal resources and IPO proceeds. This includes a new 59m litre line in Keningau by December 2024, followed by a 178m litre line at Sandakan Sibuga Plant 1 in 2025, and another 178m litre line at Sandakan Sibuga Plant 2 by 2027. While the utilisation rate for these new lines expansion will take some time to ramp up (we assume lower 53-58% utilisation rate in FY26-27F), it eventually will help and position Life Water to capture rising demand as it scales into new markets like Brunei and Sarawak.

Risk factors for Life Water include (1) Disruption in water supply at manufacturing plants. (2) Fluctuation and shortages in raw material prices.

Source: Mercury Securities Research - 29 Oct 2024