DESPITE generally poor consumer confidence due to the implementation of the Goods and Services Tax, demand for bottled water is expected to remain steady as water is an essential consumer item.

The sustainable demand for bottled water is positive for Spritzer Bhd (fundamental: 1.30; valuation: 1.40) and the performance of its share price. The stock has been quite resilient over the last one year, recording an increase of 9.54% to RM2.03 as at last Wednesday. In contrast, the FBM KLCI lost 2.43%.

The company’s warrant, Spritzer-WA, lost 10.1% over the same period to 80 sen per unit. At a strike price of RM1.18 and a conversion ratio of one warrant to one mother share, Spritzer-WA is trading at a discount of 2.5% to the underlying security.

The discount makes Spritzer-WA an attractive proxy for the company’s growth until the warrant matures on Dec 13, 2016. Mercury Securities’ RM2.14 target price for Spritzer should also be taken into account.

“Based on our forecast of Spritzer’s FY2015 earnings per share and an estimated price earnings of 13.5 times, we set an end-FY2015 target price of RM2.14. This target is slightly above its market price on the date of this report and reflects a price-to-book value of 1.4 times over its FY2015F book value per share,” it says in a report dated April 29.

The target price implies an upside potential of 5.4% on Spritzer over the next three months. If the stock reaches the target level, the price gap between the shares and Spritzer-WA will expand to a discount of 7.5%, assuming the warrant price stays the same.

Spritzer joined the “RM200 million revenue per year club” at the end of the financial year ended May 31, 2013 (FY2013), and its revenue may go past RM250 million by the end of FY2015, states Mercury Securities in the report. The firm notes that Spritzer’s valuations, leverage, dividend yields and returns ratios are at reasonable levels.

In FY2014, Spritzer recorded revenue of RM238.75 million, an 18.2% increase year on year, while net profits grew 12.5% to RM21.6 million from RM19.2 million in the previous corresponding financial year.

For the nine months ended Feb 28, 2015, Spritzer’s net profit grew 5.4% y-o-y to RM15.53 million, on the back of RM181.9 million in revenue.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in Capital, The Edge Malaysia Weekly, on May 11 - 17, 2015.

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