Spritzer seen to post weak earnings in FY17

PETALING JAYA: Inter-Pacific Research expects Spritzer Bhd to register weaker earnings for its financial year 2017 (FY17), given the expenses related to its effort to increase sales in China.
The research house said in a recent report that the company has budgeted an increase in advertising cost to 8% of the group revenue from the existing 5% on the back of the highly competitive nature of the bottled water market.
Hence, its earnings are expected to contract by 15% in FY17 but to expand 12% in FY18, driven by higher sales.
“We forecast weaker earnings for FY17 at RM24 million before subsequently recovering to RM27 million coming from an expansion in sales to RM351 million," Inter-Pacific Research noted.
It has reiterated a “neutral” call on Spritzer, with a new fair value of RM2, pegged to 14 times price-to-earnings ratio (PER) based on its FY17 earnings per share (EPS) forecast of 13.42 sen.
The research house said it favours Spritzer given its position as a market leader in the local mineral water market as well as the resilient nature of the industry.
Spritzer's second-quarter (Q2) consolidated net earnings of RM6.7 million fell 29% year-on-year and 21.2% quarter-on-quarter, due to higher initial selling and distribution costs incurred in China and higher taxes paid.
Overall, Inter-Pacific Research said the company's profit before tax margin is expected to shrink by 3% from 12.9% to 9.9% due to efforts involved in the China expansion.
However, the research house said it is not unduly worried on Spritzer's lacklustre earnings growth as its revenue grew 20.7% year-to-date for the first six months.
Commenting on the input cost, Inter-Pacific Research said PET resin prices have climbed 17% from its lowest point. PET resin costs represents about 40-50% of Spritzer's revenue.
Given material prices inflate can rise exponentially, it will squeeze margins before margins can recover due to some time lag for repricing, the research noted.