SPRITZER BHD

By MIDF Research Neutral (maintain) Target price: RM2.27

SPRITZER’S first half financial year 2018 (1H18) earnings rose by 32.7% year-on-year (y-o-y) to RM13.5mil.

This is in view of the increase in volume of bottled water sold locally and lower advertising and promotion cost incurred in China.

For 2H18, MIDF Research expects earnings to be weaker mainly due to the rising cost of sales.

Nonetheless, this will be partially mitigated by the narrowing loss from China’s operation and continue resilient domestic performance.

About 70% of Spritzer’s cost of sales are in packaging. About 50% of packaging cost is made up of PET resin cost.

The research house gathered that PET resin price has spiked 24% y-o-y or RM1,000 per tonne in line with the uptrend in oil prices and weakening ringgit.

Due to the aforementioned factors, management is anticipating to increase its product prices by 5%.

“We expect the operating loss from China’s operation to narrow further in FY18 from RM10mil in FY17.

“Note that as at 1H18, the loss was reduced to RM2mil.

“The operating loss recorded for FY17 was mainly impacted by costly advertising strategies,” said MIDF Research.

Previously, the group focused on renting space in retail outlets to display its products.

Management has since revamped its marketing strategies to engage directly with consumers.

Despite the expectation of price increase, MIDF Research sees sales growth remaining at a high single digit.

This is premised on the expectation that Spritzer’s competitor will raise their prices as well to account for higher PET resin cost.