This article first appeared in The Edge Financial Daily on September 19, 2018
Spritzer Bhd
(Sept 18, RM2.30)
Maintained market perform with a lower target price (TP) of RM2.40: After a meeting with management, we came away feeling cautious about the group’s near-term prospects. Despite better top-line performance, margins could come under pressure due to rising production costs. In the longer term, the group is poised to benefit from a new bottling facility and an automated warehouse, to be completed by financial year ending 2019 (FY19).
In the recent first half of 2018 (1HFY18) results, the group registered a 10% sales growth. This was owing to a recovery in domestic demand from passive consumer spending in 2017. The likely stimulants are smaller product formats and improving sentiments. On the other hand, the export markets (mainly China) are demonstrating better traction from the shift to more customer-engaging sales strategies.
The group’s trading segment narrowed its operating losses to RM1.7 million in 1HFY18 (from RM5.2 million in 1HFY17) on cost-savings arising from the shift in sales and marketing strategies in China. Previously, foreign operations were heavily focused on physical advertising, which proved costly and ineffective. While management expects a break-even in this segment, a medium-term endeavour, we are confident of its turnaround in view of the new approach’s effectiveness.
On hindsight, the group intends to drive sales of higher margin sparkling water products (for the Spritzer and Cactus brands), which may lead to lumpy marketing expenses. Meanwhile, higher polyethylene terephthalate (PET) resin prices could be a concern for the group in the near term with rising crude oil prices. While the said product variants may provide some relief if the reception proves favourable, the group is also investing in a new automated bottling line for their small format offerings (for instance, 500ml or smaller), which could expand capacity and economies of scale for these product variations.
After a discussion with management, we are cautiously optimistic about the group’s medium-term outlook, mainly arising from cost pressures. Based on commodity readings, there could be a possible 15% increment in PET resin prices (Source: Bloomberg). Still, progress of the new automated warehouse continues to be on track, earmarked to be completed by 2H19. This could ease cost constraints in the longer term. A note on the new sales tax — the group’s range of products appears to be mostly exempted while management expects less tax costs on the matter, hence leading to lower prices. However, prices are expected to remain at lower levels despite cost pressures in the short term, which we believe could be beneficial for demand growth.
Maintain market perform with a lower TP of RM2.40 (from RM2.50). Our TP is based on an unchanged 16.0 times financial year 2019 estimated price-earnings ratio (FY19E PER), but with lower earnings as we cut our FY18E/FY19E earnings by 8.3%/4.6% in anticipation of higher production costs in the near term. Despite this, we believe the group is poised to demonstrate a longer-term improvement as most of its investments aim to bear results post-FY19.
Risks to our call include: i) poorer-than-expected sales; ii) higher-than-expected costs exposure; and iii) delay in constructing the new bottling plant and automated warehouse. — Kenanga Research, Sept 18