SPRITZER - EXPECTED HIGHER DEMAND FROM JAPAN

SPRITZER BHD
Primary Symbol & Exchange: SPRITZR
7103 - Ordinary Shares - Malaysian Stock

Exchange Price/share @ 1/4/2011 RM:0.945
Mkt Cap RM’m : 123.474
Shares (m): 130.66 Par RM: 0.50

SECTOR CLASSIFICATION
MSEB: Consumer
Fox Capital: Consumer - Drinks

Executive Chairman: Dato’ Lim A Heng @ Lim Kok Cheong
Managing Director: Lim Kok Boon

KNOWN MAJOR SHAREHOLDER(S) (as at 3/10/2008)
Dato’ Lim A Heng @ Lim Kok Cheong + 55.42%
Lembaga Tabung Haji 8.45%
Skim Amanah Saham Bumiputra 6.12%

+ Direct & indirect interest

BACKGROUND

The Spritzer Group is the largest fully integrated manufacturer of bottled water in Malaysia. It also manufactures toothbrushes, pre-forms and packaging bottles and began producing mineral water in 1988. The group manufactures and sells bottled water under the brand names of “Spritzer”, “Cactus”, “Sunsui” and “Summer”.

Group Managing Director, Mr Lim A Heng @ Lim Kok Cheong, JP, holds a 50.4% stake in Spritzer Bhd. He has more than 39 years of experience in the consumer products industry. He is also a substantial shareholder and one of the founders of Yee Lee Corporation Bhd (YLC) , a company listed on the Main Board of Bursa Malaysia. The YLC Group is mainly involved in the production of edible oils and other consumer products. The company was admitted to the Second Board of Bursa Malaysia in September 2000. The company was subsequently transferred to the Main Board.

The group comprises five active subsidiaries, two of which, Chuan Sin Sdn Bhd and Angenet Sdn Bhd, are principally engaged in the manufacturing of natural mineral water, distilled water, drinking water and carbonated flavored water. Chuan Sin Cactus Sdn Bhd (CSC) primarily sells and distributes bottled water products under the “Cactus” brand. Golden PET Industries Sdn Bhd (GPI) produces polyethylene terephthalate (PET) bottles for cooking oil and mineral water, pre-forms (raw material for manufacturing of PET bottles) for PET bottles, toothbrushes and other plastic household products. PET Master Sdn Bhd (PM) is involved in the manufacture and sales of PET bottles and polypropylene (PP) cups.

The core company in the Spritzer Group is Chuan Sin. Its water bottle plants, which are capable of producing 147 mln liters of water a year, are located on a 295-acre site in Taiping, Perak. The group has a smaller bottled water manufacturing facility in Yong Peng, Johor.

The “Spritzer” brand, Malaysia best selling natural mineral water is produced and bottled out of a vast site with bountiful natural mineral water resources in an area surrounded by lush tropical rainforests greenery, away from pollution, housing and industrial areas.

The group’s production lines are completely automated and equipped with the state-of-the-art bottling technologies. The plant is manned by qualified professionals such as food technologists, chemists, microbiologists and engineers. Over the years, Spritzer’s bottled water products have garnered a number of awards and set many milestones. The mineral water for each bottle is extracted from an aquifer located over 400 feet deep underground in the tropical rainforest. An aquifer is a wet underground layer of water-bearing permeable rock or unconsolidated materials (gravel, sand, silt or clay) from which groundwater can be usefully extracted using water well.

Taiping is said to be the town with the highest rainfall in Peninsular Malaysia, with about 4000mm of rain per year. The Spritzer group has pioneered conservation measures to ensure that its water sources are not polluted. Their water source and surrounding rainforest are has been designated as a private protected reserve. The water extracted from the aquifer within the group’s land contains beneficial trace minerals. Naturally filtered through the long distance and a variety of rock strata, the water is naturally rich in minerals, in particular Orthosilicic Acid (OSA). OSA has numerous health benefits. It keeps skin young, smooth and supple by stimulating the formation of natural collagen. It also said to help maintain a head full of thick and luscious hair. Hair with higher silicon content has more shine and lustre, and tends to drop less. Every litre of Spritzer natural mineral water contains 35 mg of soluble silicon in the form of OSA, which is an active and bio-available form of dietary silicon that the human body can absorb. The group has a full range of bottled water including natural mineral water, sparkling natural mineral water, distilled drinking water, carbonated fruit flavoured drink, non-carbonated fruit flavoured drink and functional water.

Spritzer advocates that "Not all bottled waters are the same." For the protection of its customers and in line with the Malaysian Food Act and Regulation, Spritzer bottled waters are clearly distinguished by their caps - white for drinking water and assorted colours for natural mineral water.

Other than selling bottled water under its Spritzer and Cactus brands, the group also supplies mineral water to other third parties, such as hypermarkets, supermarkets and petrol stations, which sell the bottled water under their own in-house brands. Interestingly, upon checking out Spritzer’s homepage, we find that the group even provides an online option for consumers to buy its bottled water. With a minimum order of 2 cartons, the buyers even get a complimentary delivery service for locations within the Klang Valley.

Spritzer : Subsidiary Companies Company :
Chuan Sin Sdn Bhd
Chuan Sin Cactus Sdn Bhd
Hidro Dinamik Sdn Bhd
Pet Master Sdn Bhd
Angenet Sdn Bhd
Golden Pet Industries Sdn Bhd

Source: Spritzer

Spritzer group is led by Dato’ Lim A Heng @ Lim Kok Cheong, its Non-Independent Non-Executive Chairman and Mr Lim Kok Boon, its Managing Director (MD). The chairman has more than 40 years of experience in the trading and manufacturing of edible oils and consumer products industry. He also holds top positions for the Perak Chinese Chamber of Commerce and Industry, Associated Chinese Chambers of Commerce & Industry of Malaysia, and the Malaysia-China Chamber of Commerce (Perak Branch). Dato’ Lim is also involved in Yee Lee Corporation Bhd. Meanwhile, the MD has more than 30 years of working experience in the sales and distribution of F&B products and is the Past President/Consultant of the Asia and Middle East Bottled Water Association (ABWA). He was instrumental in the growth of Chuan Sin Sdn Bhd, a wholly-owned subsidiary of the group, when it successfully switched to the production of bottled water in 1988 and is now overseeing the group’s day to day operations.


FINANCIAL PERFORMANCE

The group had recorded a higher revenue of RM35.8 million during its 2Q/FY11 ended 30th November 2010, an increase of RM6.3 million representing a 21.3% increase as compared to the corresponding 2Q/FY10. The increase in group revenue was mainly contributed by the higher sales of various bottled water products. However, the group’s profit before tax (PBT) had decreased from RM3.4 million in its 2Q/FY10 to RM2.8 million in its 2Q/FY11. This was as a result of the higher operating expenses and finance cost attributed mainly to the group's expansion plan and the setting-up of the bottling plant in Shah Alam, Selangor.

As compared to RM34.8 million reported in the preceding 1Q/FY11, the group’s revenue had increased slightly to RM35.8 million in 2Q/FY11. Group PBT had decreased from RM3.3 million in the preceding 1Q/FY11 to RM2.8 million in 2Q/FY11. This was a decrease of approximately 15.3%, mainly attributed to the higher operating expenses and finance cost as mentioned earlier.


OUTLOOK/CORP. UPDATES

In tandem with the improving domestic economy, we expect that the group’s local retail sales would grow steadily. Bottled water is a relatively inexpensive consumer product, and we foresee that the demand would grow steadily. At the moment, less than 10% of Spritzer’s group sales are derived from exports (to destinations such as within Asia and Australia).

1) Increase product range

In line with the group’s expansion plan and the enhancement of its production capacity, Spritzer has been increasing its product range to cater to the needs of the various market segments. With these continuous efforts to promote and nurture their various brands, the group’s sales volumes of its various bottled water products will continue to grow. Spritzer is also looking at expanding its sales of water in larger container sizes (up to 5 gallons) for the use of water dispensers at office or home premises. Besides Taiping and Shah Alam, the group also has a bottling facility in Yong Peng, Johor.

2) Economy growing steadily

The latest available Malaysian economic data (January 2011) revealed reasonably positive growth rates in y-o-y percentage terms, for instance: IPI (+1.0 y-o-y), and Manufacturing Sales (+7.7% y-o-y), Exports (+3.0% y-o-y) and Imports (+13.5% y-o-y). Malaysia had reported a very respectable 4Q/2010 GDP growth of +4.8% (+7.2% for full year 2010 GDP), stable 4Q/2010 unemployment rate of 3.2% and manageable CPI of 2.4% (January 2011). Meanwhile, Bank Negara Malaysia (BNM) had last reaffirmed its accommodative overnight policy rate (OPR) of 2.75% in March 2011.



WHY WE FEEL THAT SPRITZER IS A "TRADING BUY"

1) Demand for Spritzer water to be boosted by Japan nuclear fallout disaster

It is understood that Spritzer is finalising a deal to increase exports of mineral and drinking water to Japan to alleviate the shortage there. Radioactivity from the Fukushima Daiichi nuclear power plant, which damaged in the March 11, 2011 earthquake and tsunami, is seeping into the drinking water in the Tokyo and Tohuku regions. Radioactive contamination in the water supply has reached a level that makes it unsafe for consumption by infants and the Japanese government has called on water companies to increase supplies.

Spritzer's advantage is that they are already exporting to Japan and therefore, they know the dealers there. They expect a big boost to their shipments there as the nuclear crisis continues to unfold.

The radiation scare affects every part of Japan, and hence, the increase in demand from outside Japan can be very tremendous. Exports to Japan contributed about RM7 million or 10% of Sprinter's total revenue for 1H2010 ended 31/11/2010. The company says additional orders from Japan may boost its shipments to Japan by 30% to 40%.


2) Consistent dividend payout

The group had declared a first and final tax exempt dividend of 2.5 sen per share (2.5 sen DPS) for its financial year ended 31st May 2010 (FY10). The dividend was subsequently paid out during December 2010. Spritzer has a consistent dividend payout track record in recent years, of at least 25% of its annual net earnings.


3) Mercury Securities have made a "Buy Call with substantial upside" for Spritzer.

Based on their forecast of Spritzer’s FY11 EPS and an estimated P/E of 9 times (within its historical range), they set a FY11-end Target Price (TP) of RM1.10. This TP is 16.4% upside from its current market price of RM0.945. Our TP for Spritzer reflects a P/BV of 0.96 times over its FY11F BV/share. Meanwhile, the local beverage sector’s average P/E and P/BV is 11.8 times and 2.5 times, respectively. It is worth noting that above have yet to take into account the potential revenue boost from the Japan nuclear disaster.


4) Market leader (i.e. top producer) in Malaysia

Spritzer is in a competitive industry but it is a market leader in Malaysia and it has remained profitable when many mineral water producers have closed shop. The additional orders from Japan will help the company expand its market share.

GOLDEN OPPORTUNITY IN ADVERSITY

There has been a long break since the last posting. During that period, the world was faced with a few obstacles which has interrupted the global economic recovery most notably:-

1) heightened geopolitical tension in the Middle East (Egypt) and North Africa (Libya)

2) March 11 2011 earthquake and tsunami in Tokyo, Japan, which was followed by a nuclear crisis.

These tensions and crisis have resulted the equity market to suffer a downward spiral all over the world arising from panic selling. The unfolding nuclear crisis in Japan is expected to continue to dampen market sentiments as investors take a cautious stance. Even though markets have recouped some of their losses since Japan was hit buy an earthquake and tsunami on March 11, 2011, uncertainties still linger, especially with the actual economic fallout from the developing nuclear crisis.


A report by Nomura Securities Ltd issued last week states that it expects a steep slide in Japanese consumer spending on services, including eating out and recreational services. It anticipates the recent Tohoku, Tokyo earthquake is likely to have heavier impact than the Kobe earthquake in 1995. The Nikkei 225 has recovered only slightly, closing at 9,708.39 last Friday (April 1, 2011) - still far below its pre-earthquake close of 10,434.38 on March 10, 2011.



However, investors can take comfort in the fact that the Dow Jones Industrial Average in US, which plunged heavily after the terrorist attacks on New York's World Trade Centre (WTC) on Sept 11, 2001, recouped all its losses by end of year 2001. There was a widespread fear in the financial markets when Dow Jones fell 684.81 points after the US stock markets opened a week after the WTC attacks. As panic spread amid uncertainties, Dow Jones lost some 1,369.7 points to close at 8,235.81 on Friday, Sept 21, 2001. Nevertheless, by the end of 2001, not only Dow Jones pared its losses, it also managed to register a decent gain of 415.99 points between Sept 10, 2001 and Dec 31,2001, closing at 10,021.5 points.



On a visit to South Korea Monday (Mar 21, 2011), the billionaire investor Warren Buffet spoke of the possible positive economic outcomes from the earthquake-tsunami-meltdown tragedy in Japan: "Frequently, something out of the blue like this, an extraordinary event, really creates a buying opportunity. I have seen that happen in the United States, I have seen that happen around the world. I don't think Japan will be an exception."


If you decide to take the plunge and buy Japanese stocks, the high risk of those stocks means you should be prepared to wait a long time to reap those expected returns. If you are investing for a short-term killing, you may be likely to be disappointed.