Drag on Spritzer’s profit margin seen

While the group’s sales will likely recover given the reopening of the economy, Public Investment Bank Research (PublicInvest) is wary about the group’s profit margins due to the spike in resin prices.

PETALING JAYA: Spritzer Bhd’s margins in the near term are expected to be dragged down by higher input costs, the stronger US dollar and down-trading activities.

While the group’s sales will likely recover given the reopening of the economy, Public Investment Bank Research (PublicInvest) is wary about the group’s profit margins due to the spike in resin prices.

Spritzer is the largest and most integrated bottled water producer in Malaysia with an estimated market share of 40%.

“In the near term, we think Spritzer’s margins could be eroded given the elevated raw material prices,” PublicInvest said in its latest report on the company.

For example, packaging cost accounts for about 70%-75% of Spritzer’s cost of goods sold. As resin prices are quoted in the US dollar, the research house said the unfavourable foreign exchange rate will have a negative impact on Spritzer’s margins as well.

“Additionally, we gather the group’s drinking water sales have been picking up recently, likely attributable to down-trading activities, where consumers are switching away from mineral water given the inflationary pressure.

“We think this will have a negative impact on Spritzer’s margins as mineral water provides better profit margins compared to drinking water,” added PublicInvest.

Spritzer’s management is said to be looking at raising the average selling price (ASP) of its products should resin prices remain elevated.

“We remain wary that the adjustment in the ASP might not be sufficient to offset the impact from the rising input costs, as the intensive nature of the bottled water industry might be challenging for Spritzer to pass on the cost without losing market share,” the research house said.

Despite the near-term challenges, PublicInvest believes Spritzer will be able to ride it out as “we expect demand for bottled water to recover, in tandem with the revival of economic activities, given Spritzer’s market leader position in Malaysia’s bottled water industry”.

While Spritzer’s topline is expected to improve due to the stronger demand for bottled water, the research house opined that Spritzer’s estimated financial year 2022 (FY22) bottomline will be dragged by the spike in input costs.

“Hence, we are projecting FY22 earnings to fall by 5% year-on-year (y-o-y). We anticipate FY23-FY24 earnings to rise by 14%-21% y-o-y as Spritzer gradually adjusts its ASP,” added PublicInvest.

As of the first quarter of FY22, Spritzer was sitting on a net cash position of RM16mil.

While Spritzer’s bank borrowings are expected to increase to fund expansion plans, the research house does not expect it to have a huge impact on its financial position, given its net cash position and its ability to generate positive free cash flow (FCF).

“We are projecting Spritzer to generate positive FCF of about RM27mil to RM40mil in FY22 to FY24.”

Spritzer had recently adopted a dividend policy of at least paying out 35% of its net profit attributable to shareholders.

Going forward, PublicInvest has forecast a dividend per share of 3.8 sen to 5.3 sen, based on a payout ratio of 35% by Spritzer.

The research house is initiating coverage on Spritzer with a “neutral” rating and a target price of RM1.98 a share.

This is based on an average price-to-earnings ratio (PER) multiple of 15 times pegged to its estimated FY23 earnings per share (EPS).

“We believe the valuation ascribed is fair, as it is close to Spritzer’s five-year historical average forward PER, which also represents about a 20% discount to the average PE ratio industry peers given Spritzer’s smaller market capitalisation,” PublicInvest stated.

At the market close yesterday, Spritzer settled unchanged at RM1.89, giving it a market cap of RM398.8mil.

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