Spritzer maintains earnings momentum

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AS costs rise, the manufacturing sector may see the oncoming threat of slimming margins, but it has been a different picture for Spritzer Bhd.

For its first financial quarter ended Aug 31, 2014 (1QFY2015), the mineral water producer reported a 27.7% jump in net profit to RM6.7 million or 4.91 sen a share, while revenue rose 12.07% to RM62.4 million.

Its 1QFY2015 pre-tax profit of RM8.76 million translates into a pre-tax margin of 14%, a notable expansion compared with RM6.56 million or 11.8% in the previous corresponding quarter.

Spritzer closed at RM2.07 last Thursday, giving it a market capitalisation of RM286 million.

The company’s earnings growth momentum for the quarter ended August, despite the end of the dry season as well as the water rationing  in Selangor in April, has surprised investors.

In a written reply to The Edge, Spritzer says the improvement in earnings was due to a few factors, starting with the dry weather in the early part of the year, followed by higher average selling prices (ASP).

“Dry weather was a contributing factor to higher sales of bottled water; people need more water for hydration. In the last two quarters of FY2014 (quarters ended February and May 2014), our sales and profit improved significantly due to the water rationing (low rainfall and hot weather) in certain states,” it says.  

While the group managed to revise its selling prices upwards at end-FY2014 amid higher input costs, much of the higher ASP was contributed by a better sales mix, it says.

“The improvement in the average selling price in FY2014 is not so much due to higher prices, but rather the better sales mix that we have achieved. Strong branding and the introduction of larger pack-size products have improved our sales mix with higher sales of the more profitable products,” the group says.

Its Spritzer brand comes with better margins, it says. The larger pack-size products, such as  six litres and 9.5 litres, launched at end-2012, are getting more popular and contributed to the improvement in earnings.

Spritzer’s earnings have been on an upward trend for the past three financial years, growing from RM10.59 million in FY2012 to RM19.23 million in FY2013 and RM21.57 million in FY2014.

Apart from the rise in earnings, margins have improved as well, the group says. The gross margin for bottled water, before operating expenses, was less than 30% in FY2010, but improved to more than 30% in FY2014.

“Different products are sold at different prices, so sales mix affects our average selling price and margin. Margin is also affected by the change in the raw material cost. Naturally, our margins will also improve with larger volume through greater economies of scale,” the group says.

During the three-year period, net asset value per share grew from RM1.15 as at FY2012 to RM1.44 as at Aug 31, 2014, while its share price more than doubled, from less than 90 sen in 2012 to a historical high of RM2.38 in August this year.

Dividend per share has risen in tandem with earnings. For FY2014 and FY2013, dividend per share was four sen, compared with three sen in 2012 and 2.5 sen in 2011.

“For the past five years, we achieved top-line revenue compound annual growth rate of about 16%, aided by some non-recurrent events like tap water supply problems and water rationing in some areas. As inflationary pressure increases, domestic demand and consumer spending may be affected.

“That said, we are and will still be working hard to achieve a double-digit revenue growth in FY2015. We are mindful of the industry annual growth of about 6%, as suggested by some industry research reports,” Spritzer says.

At present, the group’s bottled water capacity is about 500 million litres per annum.

This, the group says, is after the various recent upgrades and enhancements to its production facilities. “How much more we are going to add to our capacity depends on how much more we are able to sell. We have a vast landbank in Taiping and a strong balance sheet, thus we have ample capacity for expansion.”

Meanwhile, export sales are growing but not as fast as its domestic sales.

“We are currently exporting to Singapore, Brunei, Australia, New Zealand, Hong Kong, and Japan. As for new export markets, we are looking at the US and China. The export sales growth is much harder to predict, but for now, we will work on the 10% target [of revenue] as we have a much larger revenue base,” it says.

Mercury Securities, the only research house covering the stock, recently revised its call on Spritzer to a “buy”. Based on its forecast of Spritzer’s FY2015 earnings per share and an estimated price-earnings ratio of 12 times, it set an end-FY2015 target price of RM2.35.

As at Sept 29, 2014, Bursa Malaysia-listed Yee Lee Corp Bhd owned a 32.1% stake in Spritzer while Yee Lee Holdings Sdn Bhd held 13.49%. The Yee Lee group is controlled by Datuk Lim Kok Cheong, who is the also the president of the Associated Chinese Chambers of Commerce and Industry of Malaysia.

This article first appeared in The Edge Malaysia Weekly, on November 10 - 16, 2014.