KUALA LUMPUR (June 27): Costlier crude oil along with a stronger US dollar will erode Spritzer Bhd's profit margin, the bottled water producer admitted.
"Costlier oil will translate into costlier PET resin, which is the main raw material used in making the [plastic] bottles.
"PET resin is normally quoted in US dollar so a stronger US dollar would mean we will have to pay more for our PET resin," a company representative said in a brief email reply to theedgemarkets.com recently, when asked about the impact of surging oil prices on its manufacturing costs.
According to the US-based PET Resin Association, PET — which is short for polyethylene terephthalate, the chemical name for polyester — is a clear, strong, and lightweight plastic made from crude oil and ethane extracted from natural gas that is widely used for packaging food and beverages, especially convenience-sized soft drinks, juices and water.
Following Russia's incursion into Ukraine, oil prices soared, with Brent crude soaring past US$120 per barrel in March. At press time, it retreated to US$112.91 per barrel. The US dollar, meanwhile, was trading at 4.4047 against the ringgit, up 6.21% from 4.147 a year ago.
This corresponds with concerns highlighted by PublicInvest Research, which on Monday (June 27) initiated coverage of Spritzer with a "neutral" call, about the group's profit margins due to a rise in resin prices.
"... we remain cautious about Spritzer's margins on the back of a spike in raw material costs. Additionally, we expect Spritzer's China operations to remain a drag in the financial year ending Dec 31, 2022 (FY22) to FY24, given the lockdown measures and intense competition. Therefore, we project FY22 earnings to fall by 5% year-on-year before resuming its growth trajectory at 14%-21% in FY23-24," said the research firm.
Nevertheless, it anticipates that Spritzer's sales would grow at a three-year compound annual growth rate (CAGR) of 9%, while the global water market (spring water, purified water, mineral water, sparkling water and others) is expected to grow at a CAGR of 6.7% from 2022 to 2030 — based on data it obtained from Grand View Research.
PublicInvest also said it likes Spritzer for its positioning as the largest, most integrated bottled water producer in Malaysia, with an estimated market share of 40%.
"We are initiating coverage of Spritzer with a 'neutral' rating and a target price (TP) of RM1.98, based on an average PER (price-earnings ratio) multiple of 15 times pegged at its FY23 EPS (earnings per share). We believe the valuation ascribed is fair as it is close to Spritzer's five-year historical average forward PER, which also represents an about 20% discount to the industry's average. We believe this is justifiable given Spritzer's smaller market capitalisation," it added.
In an earlier report dated May 31, MIDF Research maintained its "buy" call on Spritzer, but with a revised TP of RM2.57 — down from RM2.63 previously — as it trimmed its FY22 and FY23 earnings estimates for Spritzer by 9.7% and 6.2%, respectively, in view of rising manufacturing costs and operating expenses that could hamper earnings, moving forward.
Despite this, MIDF Research believes the group would be a strong beneficiary of the economic recovery that would increase demand for its bottled water, based on the relatively affordable price of bottled water, recovery in the hotels, restaurants and cafes (HORECA) segment, and its product's position as a staple item.
Similarly, BIMB Securities Research, also in a note dated May 31, 2022, reiterated its "buy" call on Spritzer based on the economic recovery play, with an unchanged TP of RM2.60.
Last month, Spritzer reported that its first quarter revenue for the three months ended March 31, 2022 jumped 29.93% to RM98.82 million from RM76.05 million a year ago, as it saw higher sales as a result of increased demand after movement restrictions were further relaxed.
However, its net profit only rose 9.72% to RM6.65 million from RM6.06 million due an increase in cost of sales, which rose 35% in the same period. While higher sales contributed, it was also caused by higher manufacturing costs that were pushed up by costlier raw materials.
In its results filing, Spritzer noted that Covid-19, geopolitical tension caused by the Russia-Ukraine war, rising global inflation risk, higher energy prices, interest rate hikes and forex volatility would have adverse effects on both the global and domestic economies.
Having said that, it was "cautiously optimistic" that its sales of bottled water would improve further, and that it was actively managing the supply chain and material cost challenges. It was also continuing to focus on its core brands and to further automate and enhance its production processes and capacity, besides gradually introducing sustainable packaging alternatives for its bottled water products.
"The group is taking prudent measures to monitor and manage the higher input and operating costs and at the same time, actively taking steps to grow our sales volume and as far as possible, to expand the overseas market. We will focus on sustaining our sales revenue and to safeguard our market share in the bottled water industry," Spritzer added then.
Spritzer's share price settled unchanged at RM1.89 on Monday, bringing the group a market capitalisation of RM396.9 million.