This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 25 - May 1, 2016.

Those looking for a long-term investment could consider Spritzer Bhd. It is the sole listed bottled water company in the country, which manufactures the well-known Spritzer and Cactus brands. Despite the bleak economic outlook, management expects the company’s growth to continue and beat industry estimates this year. It has consistently rewarded shareholders with an average of 20% to 30% dividends for the past 15 years, despite not having a dividend policy.

Revenue has grown steadily every year since it was listed in 2000, with an average profit margin of 11% over the past 10 years (based on Bloomberg data). The company generated a profit of RM19.23 million in financial year 2013 (FY2013), RM21.56 million in FY2014 and RM22.8 million in FY2015.

Sow Yeng Chong, co-secretary and group financial controller at Spritzer, says despite the weaker consumption (mainly due to the Goods and Services Tax), revenue is expected to grow by 10% in the current financial year, higher than the industry estimate.

“Research firms such as AC Nielson have projected that the bottled water industry will grow about 6% to 8% this year. Our growth is expected to be 10%,” he says.

The company is the largest player in the bottled water industry with a market share of over 40%. Sow says the company’s market share is expected to continue to grow, even with the heightened competition, as sales and revenue growth is expected to outperform that of its peers in this financial year, thanks in part to the hot weather prompted by the El Niño phenomenon.

However, it is facing strong competition from multinational companies. These companies, Coca-cola Co, PepsiCo Inc and Frazer & Neave, have solid branding and strong distribution networks and own the bottled water brands Dasani, Blue and Ice Mountain respectively.

While Spritzer’s bottled mineral water is priced about 20% higher than that of  Dasani, Blue and Ice Mountain, Sow says Cactus brand is priced lower and is competing in the lower market segment.

“In fact, Cactus is the No 2 brand in the bottled water market after Spritzer. Cactus has a strong presence in convenience stores, hypermarkets and speed marts, but our competitors’ products are stronger in coffee shops, hotels and petrol kiosks,” he says.

Nevertheless, Sow says the company has a competitive advantage over the big boys. While its competitors focus on their carbonated drinks, Spritzer concentrate on bottled mineral water.

“When their bottled water sells well, the sale of their carbonated drinks goes down, which is what happened in the US. So companies like Coca-Cola, Pepsi and F&N will most likely [go back to] pushing their carbonated drinks,” he says.

Growing export sales in Singapore and China

Over the past few years, the company has embarked on a plan to increase its export sales, especially into Singapore, Hong Kong and China. Export sales, which now account for 7% of the company’s total revenue, are expected to increase to 10% over the medium term.

Sow says the company has increased capacity at its plant in Yong Peng, Johor, and increased sales to Singapore. Singapore was chosen because the logistical cost of exporting bottled water to the neighbouring country is low compared with other countries in Asia-Pacific.

“Bottled water, especially the mineral water industry, is usually dominated by local players. Bottled water is bulky and the profit margin is low. If the logistical cost is too high, it would make us uncompetitive,” Sow says.

In December last year, the company set up a subsidiary in Guangzhou, China, as it sees business opportunities in the world’s second largest economy due to its economic development and shift in the lifestyle of the people. The business licence of the subsidiary, which is Spritzer (Guangzhou) Trading Ltd, was obtained from the mainland Chinese government and is for 30 years until November 2045.

Sow says as the subsidiary is spending on building its brand, it does not expect it to be profitable in the next two years. He says the losses of the subsidiary in China will be compensated for by revenue growth in Malaysia.

Due to the disadvantage of higher logistical costs, Sow says the company is aiming to spend some time on building its brand in China and plans to compete in the premium segment of the market.

The company also aims to enter smaller cities in Guangzhou to avoid competing directly with the local big boys that dominate the market, such as the Hangzhou Wahaha Group Co Ltd, a private group of companies and the largest beverage producer in China.

“This is where the market development plan fits into the picture. We don’t have cost advantage in China, so we are aiming for the premium market instead of competing in the lower market segment.

“We are just venturing into Guangzhou to test our product. There is no way we are moving into the big cities like Shanghai and Beijing. That would be too ambitious,” Sow says, adding that the company is also looking to distribute its products in the Guangzhou market through local distributors.

Long-term potential

Edmund Tham, head of research at Mercury Securities Sdn Bhd, says Spritzer is a safe, stable stock for investors to hold for the long term because mineral and drinking water will always remain in demand as the country’s population continues to grow.

“It has been quite a solid company. Its profit margin is 5% to 10% on average, which rises when there is a shortage of water, haze or hot weather.

“The company has paid out 20% to 30% in dividends in the past three years, which is also considered good. It is not a growth stock, but rather a stable kind of business,” he says.

However,  Spritzer’s share price has been quite high. “The share price has gone up quite a lot recently and it was not as attractive as it was a few years ago. The valuation is currently quite high,” he says.

In a report in November last year, Tham placed a “hold” call on the company with a target price of RM2.12 at the end of FY2016.

Spritzer Bhd was trading at RM2.57 as at April 19, compared to its 52-week price range of RM1.71 to RM2.58. As at April 19, it had a market capitalisation of RM395.88 million, with a price-earnings ratio (PER) of 13.31 times and a price-to-book value of 1.43 times. It has a net debt to equity of 11.48 in FY2015. 

Clement Chew, CEO of Apex Investment Services Bhd, says Spritzer has been under-researched despite its solid performance over the years.

He says the company’s valuation is considered “fair” compared with other bottled water companies listed in Asia-Pacific. “The company now is still very much under-researched, which is a good thing. And if you look around, there are not many water stocks in the region and their valuations are much higher.” 

There is a limited number of bottled water stocks in the region as most brands are parked under multinational companies in the fast-moving consumer goods sector. One of the regional bottled water stocks in Asia-Pacific is Tibet Water Resources Ltd.

As at April 19, Tibet Water Resources, which produces premium bottled mineral water, had a PER of 17.33 times and market capitalisation of HK$5.75 billion. It has an indicated gross dividend yield of 1.79%. On April 19, the stock closed at HK$2.20, in the middle of its 52-week range of HK$1.84 to HK$3.35.

Chew says there are a few reasons he likes Spritzer, the main one being the company’s solid management team; it is experienced and remains focused on the industry it has always been working in. The company also has a positive cash flow.

In addition, he says, Spritzer has strong branding and pricing power. Its products are of good quality and there is potential for prices to be scaled up further.

“The Spritzer mineral water is of very good quality, similar to [international brands like] Fiji and Evian due to its aquifier located in Taiping, Perak. While Evian costs £1 to £2 [a bottle], you can get a bottle of Spritzer for just a few ringgit,” he says.

Chew also believes the company’s foray into China, the second largest economy in the world, will provide fuel for future growth. “[Spritzer] recently announced it is entering the Hong Kong and China markets. This could be a catalyst for future growth,” he says.

Bottled water industry in the region

The bottled water market in Asia-Pacific is growing, taking an increasing share of the global industry. This is mainly due to the large population and rising standard of living in the China and India markets.

The beveragedaily.com, a website providing daily news on the beverage industry and beverage equipment, reported in October last year that Asia-Pacific’s bottled water market share has increased to 41% in 2015 from 35% in 2011, quoting Zenith International.

Zenith International specialises in food and drink consultancy and works with over 1,000 clients in 50 countries, ranging from start-ups to multinationals.

In its report titled “Asia Pacific gulps up bottled water market share”, the news website says China overtook the US as the largest consumer of bottled water last year. The US used the most bottled water from 2004 to 2014.

The report quoted Sonny Wong, executive director of Tibet Water Resources Ltd (formerly known as Tibet 5100 Water Resources Ltd), as saying that demand for premium water is expected to grow in China as consumers are ready to pay more for clean drinking and mineral water because water pollution is a big issue there.

“In major cities, the middle class is now talking about drinking only packaged water. They are moving away from tap water ... It is necessary for water companies to tell consumers the water they sell is very clean and good for the health,” Wong says.

Vikram Grover, business head for water at Tata Global Beverages, a listed beverage company in India, was quoted in the same report as saying that demand for bottled water in India is increasing in tandem with rising consumer awareness of health and wellness. The country’s improving economic growth has also created new demand for bottled water.

“Beverage consumption in India is primarily on the go … Income levels are going up, people are seeing money for the first time. Therefore, they’re extremely value conscious and an affordable price is absolutely critical,” he says.

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