KUALA LUMPUR: Kenanga Investment Bank Bhd has initiated coverage on Spritzer Bhd, expecting the company to sustain its leading market position given the resilient demand for its products.
Kenanga IB said Spritzer’s future earnings are backed by growing export sales while investments in production and warehousing capabilities should improve output and efficiency.
“The group had ventured into the China and UK markets as a means of expanding its export market base. The move could potentially serve as a buffer against the weak domestic market which has been undermined by poor consumer spending post-GST implementation and unfavourable forex (foreign exchange),” it said in a report today.
Kenanga IB initiated the coverage on Spritzer with a “market perform” call and target price of RM2.20 based on the group’s financial year 2018 price earnings ratio of 13 times.
It said while Spritzer’s operations in China are expected to incur high gestation costs in way of high marketing expenses against the heavy competition, effective initiatives could yield promising prospects given the much larger population base and spending ability, especially in the more developed cities.
It did not anticipate a significant shift in forex exposure in the short term as Singapore remains Spritzer’s largest export market (50 per cent) at present.
For the next three years, the group aims to invest RM60 million to RM80 million to increase the automation of its production lines and key warehousing capabilities, in line with its effort to expand its production capacity by 20 per cent.
“The move should improve economies of scale and subsequently lead to margins expansion. The added capacity could also allow for more aggressive trading of products in China in the near future,” Kenanga IB said.
Spritzer currently has a total production capacity of 650 million litres per annum with an utilisation rate of 70 per cent.
Kenanga IB said backed by its three key product brands (Spritzer, Cactus, Summer) with different price ranges, the group is able to tap into the various consumer segments with different spending habits to spread and sustain its market presence, sustaining its market leading position.
Iit expects Spritzer’s financial year 2017 to close with lower earnings at RM23 million, down by five per cent, despite flattish sales of RM319.4 million against RM318.5 million in 2016, due to gestation cost from China and higher raw material prices.
It said financial year 2018 is expected to perform better with stronger sales at RM333.2 million, or four per cent growth, driven by higher export volume and product price increase of five per cent to support local sales margins.
It said net earnings could potentially record at RM30.3 million, at a growth rate of 31 per cent, on the back of higher margins in lieu of the said price increase and cost savings from higher production efficiency.