Spritzr ,,, Feb12

Mercury Securities Sdn Bhd Research report.

“1H Results in-line”
The group recorded a revenue RM45.1 million during 2Q/FY12, an increase of 25.8% y-o-y.
The increase in revenue was mainly contributed by the higher sales of various bottled water products coupled with the increase in demand from Thailand when massive floods hit Bangkok in October 2011.

“Demand up due to Bangkok floods”
We believe this increase was due to production by bottling plants being hampered by floodwaters and also the large number of flood refugees. Meanwhile, the group’s 2Q/FY12 NPAT of RM3.3 million was higher by 14.1% y-o-y. This was mainly attributed to the higher sales of the more profitable mineral water products.

For 1H/FY12, the group recorded revenue of RM86.3 million, an increase of 22.2% as compared to 1H/FY11. However, group NPAT for 1H/FY12 was lower by 13.9% compared to 1H/FY11. This was mainly due to the higher finance and operating cost incurred attributed to the group's expansion plan and the setting-up costs of the bottling plant in Shah Alam, Selangor.

Comparing versus the preceding 1Q/FY12, the group’s 2Q/FY12 revenue was higher by 9.3% q-o-q. This was mainly attributable to the unforeseen sales of bottled water products to Thailand during the massive Bangkok floods in October-November 2011. Group 2Q/FY12 NPAT more than doubled-up q-o-q versus 1Q/FY12. This increase was mainly attributed to the higher sales of the more profitable mineral water products during the quarter.

OUTLOOK/CORP. UPDATES
On the demand side for Spritzer, the domestic economic environment still appears supportive. This is so due to the fact that most of the group’s sales are derived from the domestic market (whereby the group is the
market leader). Nevertheless, the group faces challenges such as domestic inflation and the volatility of raw material prices. The group plans to continue focusing on improving its productivity and operational
efficiency in order to remain competitive. In line with its expansion plan and higher installed capacity, the group will further increase its product range to cater to the needs of various market segments. This would include the introduction of bottled water suitable for the use of water dispensers.

Malaysia had reported a reasonable unemployment rate of 3.1% (November 2011) and CPI of 3.0% (December 2011). Bank Negara Malaysia (BNM) had maintained its overnight policy rate (OPR) at 3.0%.
Meanwhile, Malaysia recorded a strong 3Q/2011 GDP growth of 5.8%, amidst weak economic growth in the developed regions (US, EU and Japan).

“BonusWarrants given out”
On 30th September 2011, the group had proposed a Bonus Issue of up to 32,664,667 warrants in Spritzer on a 1-for-4 basis. The bonus issue was subsequently approved by The Controller of Foreign Exchange (via Bank Negara Malaysia) and Bursa Malaysia.

Spritzer’s shareholders had also approved the bonus issue at an EGM held on 24th November 2011. On 14th December 2011, a total of 32,658,666 free Warrants had been issued and alloted to the shareholders (1 Bonus Warrant for every 4 existing Ordinary Shares held on 13th December 2011. These warrants were
subsequently listed on Bursa Malaysia on 20th December 2011.

VALUATION/CONCLUSION
We expect that Spritzer would maintain the same level of DPS (2.5 sen dividend per share, tax exempt) in FY12 as in the past 2 financial years. With a beta (correlation factor) of 1.00 to the KLCI, Spritzer (-4.6% YTD) has slightly underperformed the KLCI (-1.1% YTD) this year. Market conditions have been volatile
during the past year, impacted by the “Arab Spring” uprisings, major Tohoku natural disaster in Japan, “sovereign debt” issue in Europe and also the “debt ceiling” issue in the US. As Spritzer is not an especially large market-cap stock, this may put a dampener on its market visibility and trading volume.

“Maintain Hold Call”
Based on our forecast of Spritzer’s FY12 EPS and an estimated P/E of 11 times (within its historical range), we set a FY12-end Target Price (TP) of RM0.88. This TP offers a slight 6.7% upside from its current market price and reflects a P/BV of 0.77 times over its FY12F BV/share.

We would upgrade our call to a Buy Call once Spritzer reports sustained improvement in its
earnings performance. We note that its improved 2Q/FY12 results were partly due to the demand
from Thailand during floods. As such, it is hard to say that this strong performance will be
repeated in the following quarters.

We are actually comfortable with Spritzer’s topline (revenue) performance. Nevertheless, there are factors affecting its profit margins, particularly raw materials (PET resins) for bottling. Spritzer’s P/E, P/BV, net gearing, dividend yields and ROEs are all at reasonable levels.

In the mean time, Spritzer’s business also faces possible routine risks such as a slower rate of economic growth, weak product demand growth, foreign exchange fluctuations, rising production costs (raw materials – e.g. PET resins for plastic bottling) and stiff competition from other major bottled water manufacturers.