MIDF Research remains optimistic about the bottled water demand outlook, as they believe the current share price for Spritzer Bhd has already factored in this optimism.
A recent company briefing revealed Spritzer has fully commissioned two new production lines for 250ml-500ml bottled water, increasing total production capacity to 1.2b litres. The current average utilization rate is 75%, mainly driven by hot weather, a return of tourists, and water supply disruptions in certain states.
Moving forward, management plans to allocate RM70-80m for FY24F capex for a new sparkling water production line, replacement of old production lines, and expanding ASRS warehouse capacity from 15k to 20k pallets.
Management observed significant double-digit growth in sparkling water sales over the past two quarters, with a +34.3%qoq increase in 1QFY24 and a +25.4%qoq increase in 4QFY23.
The group currently offers two stock keeping unit (SKUs) for sparkling water: 1-litre bottles (56% of total sales, mainly original flavour) and 400ml bottles (44% of total sales, with 26% original and 17% lemon flavour). While sparkling water sales contribute only 2- 3% of total sales, management aims to expand this segment due to growing demand and a low base.
Export sales remained small but better margin. Export sales contributed 7-8% of total revenue, mainly from Singapore.
While all brands are sold in Singapore, the Spritzer brand, with its better margins, remains the primary focus.
MIDF said in a note today (June 5) that the average PET resin cost increased slightly from RM4.38/kg in 4QFY23 to RM4.39/kg in 1QFY24. Currently, PET resin costs around RM4.50/kg.
Moving forward, with Brent crude oil prices remaining below USD90/barrel, MIDF Research expects PET resin costs to stay within the RM4.35-RM4.50/kg range. This could indicate a stable gross profit margin ahead. Management also indicated a 2-month stock of PET resin with local sourcing options, which minimise the supply risks.
The group installed solar rooftop panels with a capacity of 2.846 kWp, with an additional 1.092 kWp in progress. This has saved RM356.7k in electricity costs in 1QFY24.
Spritzer introduced new brand ambassadors, including Syafiq Kyle and Aina Abdul. Overall, the advertising and promotional expenses account for 5% of Spritzer’s revenue to boost brand recognition and market share.
Management alludes that if third-party logistic providers are not exempted from diesel subsidy rationalization and pass on the cost to Spritzer, the group will have no choice but to implement higher price adjustments.
MIDF Research maintains Neutral on Spritzer Bhd with an unchanged TP of RM2.55. Post briefing, we retain our FY24-26F earnings forecast.
Looking forward, MIDF Research expects solid demand for Spritzer’s bottled water due to strong tourist traffic, increased out-of-home activities, hot weather, water supply disruption across Peninsular Malaysia and the normalization of business events.
The group also benefits from the normalisation of Brent crude oil trading below USD90/barrel, which will sustain the PET resin prices. Note that Brent crude oil is the key commodity for PET resin. Yet, MIDF Research believes the recent share price hike has already factored in this optimism.
