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Monday, June 27, 2016

Spritzer prepared for short-term pain to achieve long-term gain

Spritzer prepared for short-term pain to achieve long-term gain
By Tan Siew Mung / The Edge Financial Daily | June 27, 2016 : 9:54 AM MYT

This article first appeared in The Edge Financial Daily, on June 27, 2016.

KUALA LUMPUR: Turning water into cash is an uphill task, even for a successful bottled water producer such as Spritzer Bhd. This is especially so when it comes to exporting to China; the logistics cost is high.

Spritzer started exporting mineral water to China at the end of April. Malaysia’s largest bottled water producer expects the venture to become profitable in two years. In the meantime, the expenses incurred to carry out the venture may affect its financial performance.

“Our net profits in the next two years are expected to be dragged down by expenses incurred for the China expansion plan, but the expansion is important as we need a new market for growth,” said the group’s chief financial controller, Sow Yeng Chong, in an interview with The Edge Financial Daily.

Due to intense competition posed by a number of established brands and lower brand awareness of Spritzer in the Chinese market, Sow said the group may need to spend about 20% of the group’s revenue there on advertising and promotion (A&P).

The overall A&P budget, therefore, is expected to reach up to 8% of the group’s revenue in the next two years, from 5% now.

The group’s capital expenditure is set to increase to RM30 million to support the expansion, from RM20 million in the past five years.

Spritzer’s current capacity is 600 million litres, of which 75% comprises mineral water and 25% drinking water. Based on Sow’s estimation, the management needs to increase the capacity by up to 20%, to cater for the demand in China.

A firm believer in investing to achieve further growth, Sow said Malaysia’s bottled water market is limited due to the relatively small population, while drinkable tap water has also limited sales.

“We don’t have a big market for bottled water. To grow, we have to look regionally. China offers good potential,” he said.

Sow is confident the group’s pricing strategy and its strong domestic sales performance are sufficient to mitigate its earnings risk.

According to him, the China expansion plan will not affect the group’s business and profits.

“Water is bulky, we know that expanding to China is even more costly. However, we will not be competing with the low-price segment. We will sell it at medium to premium price, so it can cover our cost,” he said.

Sow said it launched ‘Spritzer Tinge’ in China at a price of between five to eight yuan per 500ml bottle. It will also sell Spritzer Fibre and Spritzer mineral water there.

Spritzer’s domestic market is stable, with the group commanding a dominant market share of 40%, he said.

“As we are able to manage the local market, we believe our earnings are sustainable. It gives us the confidence to venture into China,” he said.

As the group has been in the market for more than 26 years, the management is familiar with the fast-moving consumer goods business and knows how to make its products available at various retail outlets in China, added Sow.

“We know if volume improves, the economic scale comes in, [and] we will have better cost control to improve earnings. Moreover, if we are able to price bottled water at a premium, the margin is actually better than in Malaysia,” said Sow, noting that imported products are popular in China.

For the third quarter ended Feb 29, 2016 (3QFY16), the group’s net profit rose 14.76% to RM6.19 million from a year ago. This is despite a 4% fall in pre-tax profit to RM7.3 million, mainly due to higher input costs and selling and distribution costs incurred for market exploration, product launching, advertising and promotion.

The group, which recently changed its financial year end from May 31 to Dec 31, is en route to achieving a record high net profit for the year ended May 31, 2016 (FY16), according to Sow.

“As we have made a net profit of RM20.89 million in 9MFY16 [versus RM15.53 million for 9MFY15], it is easy to surpass last year’s net profit of RM22 million,” Sow said.

Spritzer’s share price hit a five-year high of RM2.60 on April 29, but has since pulled back slightly with analysts saying it is fully valued. The counter closed at RM2.40 last Friday.

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