This article first appeared in The Edge Malaysia Weekly on September 10, 2018 - September 16, 2018

INVESTORS with sharp eyes would have noticed that Yee Lee Corp Bhd has been slowly upping its stake in associate company Spritzer Bhd. As at Aug 30, Yee Lee’s stake in the mineral water company stood at 29.21%. This was after it had purchased 654,800 shares off market and 41,700 shares on the open market.

About a year ago, Yee Lee’s 32.07% stake in Spritzer was diluted to 27.88% after the latter embarked on a private placement of 27.38 million shares, or 13.04% equity interest, which was subscribed for by Tasik Puncak Holdings Ltd.

Now with 29.21%, Yee Lee still has some way to go if it plans to regain its former stake of 32.07%. However, it is possible that the company will continue to raise its stake in Spritzer as the two companies have had a mutually beneficial relationship so far, say analysts.

While Spritzer’s core business is bottled water production, Yee Lee’s interests are diverse, ranging from oil palm plantations and the manufacture of aerosol cans and corrugated carton boxes to palm oil milling and refining, and the trading of food and beverage products.

It is worth noting that Yee Lee and Spritzer are run by the same family. They also share the same chairman — Datuk Lim A Heng @ Lim Kok Cheong. Lim is Yee Lee’s largest shareholder with a 52.6% stake that is held indirectly through Yee Lee Organization Bhd. In Spritzer, he indirectly holds 42.92% through his interests in various private vehicles, according to filings with Bursa Malaysia.

Spritzer managing director Datuk Lim Kok Boon is Kok Cheong’s brother while CEO Lim Seng Lee is Kok Boon’s son.

Meanwhile, Yee Lee CEO Lim Ee Young is Kok Cheong’s son.

An analyst with Public Invest Research says the trading relationship between the two companies is an important one. “Yee Lee benefits from Spritzer being a market leader in bottled water in Malaysia. It buys and distributes the bottled water.”

Spritzer commands about 40% of the Malaysian market and is ranked the largest bottled water producer in the country.

The company’s profit contribution as an associate of Yee Lee has also increased over the last five financial years — from RM6.24 million in the financial year ended Dec 31, 2013 (FY2013) to RM11.22 million in FY2017.

According to Yee Lee’s 2017 annual report, the profit contribution from FY2017 was boosted by the company’s recognition of a RM3.34 million gain from the increase in its share of net asset value in Spritzer that arose from the private placement in October last year.

Spritzer contributed RM3.84 million to Yee Lee’s profit in the six months ended June 30, 2018, representing slightly more than 20% of the latter’s total net profit.

Kenanga Research, which tracks Spritzer, believes local demand could be stimulated by a better product mix, given the recovering consumer confidence in the market. Although it is mainly domestic-driven, Spritzer ventured into China in 2016, where the operation is loss-making, and the UK last year.

“Management is hopeful of a turnaround (in China) with a transitioning of strategies and emphasis on direct selling rather than banking on marketing-led demand. This could mitigate a potential compression of margins in the near term as packaging costs (that is PET resin) may rise following unfavourable price trends,” says the research house, which has a “market perform” recommendation on Spritzer.

MIDF Research analyst Nabil Zainoodin, who is “neutral” on the stock, says in his report that he expects the outlook for Spritzer to remain challenging due to increasing competition in the local bottled water market and a slow product acceptance rate in China.

“We expect the operation in China to take longer than the stipulated time frame of three years to break even,” he says, maintaining his target price for the stock at RM2.27.

In the longer term, Spritzer’s new automated warehouse in Taiping could increase its capacity and provide economies of scale, says Kenanga Research. The warehouse is expected to be operational in 2020.

The increased capacity and potential for higher sales augur well for Spritzer, which will indirectly add to Yee Lee’s profit.

As at June 30, Spritzer had no gearing and was in a net cash position of RM10.35 million. Analysts have pegged the stock’s estimated price-earnings ratio at 19.58 times. Nevertheless, the three research houses tracking the company have a “neutral” recommendation on the stock.

At its closing price of RM2.35 last Thursday, the stock had gained 11.4% over the year while market capitalisation stood at RM493.4 million. Dividend per share of 5.5 sen over the last 12 months put yield at 2.3%.

Yee Lee’s share price has barely moved over the past year, closing at RM2.15 last Thursday. This gave the company a market capitalisation of RM411.9 million and dividend yield of 2.09%.

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