SPRITZER BHD
Target Price: RM2.20 KENANGA Research has initiated a coverage on Spritzer Bhd with a “market perform” call and target price of RM2.20 based on price earnings ratio 13 times financial year 2018 ending Dec 31 estimate.
It said the valuation is at a 25% discount from the stock’s small cap beverage peers, including Power Root Bhd at 17 times PE, which we believe is fair because Power Root’s dividend potential of about 6% yield.
The research house reckoned Spritzer’s future earnings is backed by growing export sales, while investments in production and warehousing capabilities should improve output and efficiency.
The company’s leading market position is expected to sustain given the resilient demand for the group products.
Spritzer had ventured into the China and UK markets as a means of expanding its export market base.
Kenanga said the move could potentially serve as a buffer against the weak domestic market, which has been undermined by poor consumer spending post-GST implementation and unfavourable foreign exchange.
Nonetheless, it expected that the operations in China to incur high gestation costs from high marketing expenses against the heavy competition.
For the next three years, Spritzer has aimed to invest about RM60mil to RM80mil to increase the automation of its production lines and key warehousing capabilities.
The management targeted to expand production capacity by 20%.
Kenanga said the expansion of production and warehouse capabilities 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 about 70%.
Spritzer 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.
In addition, Kenanga said the exclusive licensing of the group’s key water well locations make it difficult for new entrants to compete in the market.
For FY17, Kenanga expected that Spritzer to record lower earnings at RM23mil on the back of flattish sales of RM319.4mil against RM318.5mil last year, due to gestation cost from China and higher raw material prices.
But it anticipated the company to perform better in FY18 with stronger sales at RM333.2mil driven by higher export volume and product price increase of 5% to support local sales margins.
Net earnings could potentially record at RM30.3mil, up 31% year-on-year on the back of higher margins in lieu of the said price increase and cost savings from higher production efficiency.