SPRITZR ... Feb10

S & P Results Review & Earnings Outlook
• Spritzer reported 1HFY10 (May) net profit of MYR3.2 mln (+67.8% YoY), which accounted for 56.1% of our previous full-year forecast. The results were above our expectations, the variance lying in a higher-than-expected operating margin in 2QFY10 and lower-thanexpected tax charges.

• Revenue in 2QFY10 grew 23.7% YoY. This was mainly attributed to higher sales of various bottled water products. Sales declined 5.4% QoQ because of lower demand in the September fasting month. Despite marginally lower sales in 2QFY10, operating margin improved to 12.7% in 2QFY10 from 12.4% in 1QFY10.

• We expect sales in 2HFY10 to be stronger as the seasonally high demand for bottled water during the Chinese New Year period will be captured in 3QFY10. The group’s expansion project, which will increase its bottled water capacity by 20% initially, is underway. We are projecting higher interest expense in the 2HFY10, which would
compress profit margin.

• We lift our net profit earnings estimate for FY10 by 8.4% to MYR12.0 mln to factor in the higher-than-expected operating margin and a lower tax charge. We reduce our net profit forecast for FY11 to MYR13.0 mln (from MYR13.9 mln) on expectation of lower margins due to rising resin prices.

Recommendation & Investment Risks
• We raise our recommendation on Spritzer to Buy (from Hold) with a slightly higher target price of MYR0.77 (MYR0.75). The higher target price reflects our earnings upgrade, after reviewing 2QFY10 results. Demand for Spritzer’s bottled water products remains strong, growing at an annual rate of 10%-15% and in our opinion, the recent underperformance in share price has sufficiently reflected market
concern over higher resin prices.

• We continue to peg its FY10 beverage earnings at a 20% discount (unchanged) to the Malaysian food and beverage sector forward average PER of 11.1x (from 11.8x previously), in view of Spritzer’s smaller market capitalization. The target PER for its plastic packaging division is based on the sector’s 2010 average PER of 6.3x (from 6.5x).

• To finance its expansion plan, group borrowings increased to MYR58.7 mln as at November 2009 from MYR25.1 mln as at August 2009, raising net gearing to 40.0% from 14.1%.

• Risks to our recommendation and target price include: (i) weaker-thanexpected
demand for its products, (ii) higher-than-expected increases in raw material, packaging and energy costs, (iii) delay in its expansion program and (iv) a higher-than-expected tax charge.