SPRITZER BHD

By Kenanga Research Rating: Market Perform Target Price: RM2.20

SPRITZER has proposed a 15% placement which will enlarge its share base to about 210 million (from 182.6 million) shares.

The proceeds from the exercise will primarily be used to fund the construction of a new automated warehouse in Taiping to be completed by 2020 to increase capacity.

Kenanga Research said the funds would secure the group’s long-term growth plan at the expense of short-term earnings per share dilution.

“We maintain our market perform call and target price of RM2.20 on a new blended price to earning ratio (PER) and prive to book value valuation,” it said.

“We are neutral on the impact of the injection of cash into the group’s operations.

“While this would eliminate funding concerns for the warehouse, which we believed would have otherwise be funded through a mix of debt and internal cash, the exercise may only translate to improving its financial year 2018 estimated net interest expense position of circa RM1mil to a net interest income position of circa RM0.3mil,” it said.

Kenanga Research said it does not expect the exercise to shift the operational landscape of the group significantly as it has accounted for the construction of the warehouse on the group’s long term outlook.

However, the dilution of share base would erode shareholders’ value in FY18 given the 15% larger share base, it said.

“We expect FY17 to remain mostly unaffected with the proposed cash call that will be completed by the fourth quarter. We revise our FY18E earnings by 2.7%, accounting for adjustments towards our net interest income assumptions,” it said.

Kenanga Research maintained its market perform and target price of RM2.20.

“Our target price is derived from a revised blended FY18E PER/PBV ratio of 13 times/1.3 times (both based on its average three-year PER and PBV) from 13 times FY18E PER previously.

“The expanded share base would reduce our revised FY18E EPS to 14.9 sen (from 16.7 sen previously),” it said.