This article first appeared in The Edge Financial Daily on June 5, 2017 - June 11, 2017

Spritzer Bhd
(June 2, RM2.45)
Initiate buy with a target price (TP) of RM2.83: Spritzer Bhd is a market leader of the bottled drinks and mineral water industry with an annual production capacity of 650 million litres from 15 production lines at three of its plants in Taiping, Shah Alam and Yong Peng. Brands sold by the company include Spritzer, Cactus, Summer, Tinge and Pop.

Spritzer is a household name in Malaysia with a market share of over 40% for bottled water and over 50% for mineral water. The mineral water-to-drinking water ratio it produces is 70:30. The company has won 69 awards in the past 27 years. The company could further increase its production capacity by another 15% in the next two to three years through enhancements to its water production lines. Moreover, management plans to build a new fully automated warehouse at its Taiping plant to meet the increase in sales and production. Thanks to its dominant market position, Spritzer has been charting undisrupted growth in the last five years. Its compound annual growth rate for net profit between 2012 and 2016 was 30%. We expect the company to continue its upward climb in the financial year 2018 (FY18) as it solidifies its existing market share while it expands into new markets.

We initiate with a “buy” recommendation and a TP of RM2.83 based on 17 times FY18 earnings per share forecast of 16.6 sen. The price-earnings ratio (PER) of 17 times is a 35% discount to the average PER of other beverage companies listed on Bursa such as Fraser and Neave Holdings Bhd, Dutch Lady Milk Industries Bhd and Nestle (Malaysia) Bhd. The discount ascribed is due to Spritzer’s smaller market cap. We like Spritzer for its resilient earnings due to its defensive business model, strong position as the market leader in Malaysia’s bottled water industry and a strong balance sheet with net cash position as at end-FY16.

Risks would include a spike in raw material prices, prolonged softness of consumer sentiment, longer-than-expected gestation period for expansion in China and contamination- or environmental-related issues at its mineral water sources.

About 70% of Spritzer’s costs of goods sold are in packaging. A spike in raw material prices will increase its costs. That said, we do not foresee a huge jump in polyethylene terephthalate resin prices as crude oil prices average below US$55 (RM232.10) per barrel year to date. A prolonged softness of consumer sentiment will dampen Spritzer’s sales as consumers find ways to cut their expenditure. However, we believe that bottled water is a very basic item at low selling prices, which should not hurt consumers’ wallet much. We commend management’s drive to search for growth out of Malaysia. However, we believe the gestation period should be at least three years before the company can see positive impact from the China market. As Spritzer’s mineral water sources are underground water, there may be geological risks. Spritzer’s water sources are inspected by the health ministry and other relevant authorities periodically and certified by the Hazard Analysis Critical Control Point system along with International Organization for Standardization. — MIDF Research, June 2