Profits flow in the water trade

Despite the widespread availability of affordable, drinkable tap water in most parts of the country, the bottled water industry continues to thrive in Malaysia.

While the industry today has seen several players come and go over the years, there still appears to be interest from newer entrants to make their attempt at success here, with various original equipment manufacturers participating as well.

The low barriers to entry and growing profits will continue to attract new players to this rather fragmented industry, which is licensed and regulated by the Health Ministry.

There are two main segments in the bottled water industry – mineral water, which is identified by various coloured bottle caps except for white; and drinking water, which is identified by only a white bottle cap, as per regulatory requirements.

Overall, the bottled water industry also benefits from any rise in tourist arrivals to the country due to its supply to the hotel, restaurant and cafe segment.

The main bottled water player in Peninsular Malaysia is Main Market-listed Spritzer Bhd, having built a sizeable brand presence and market share since its inception in 1989.

Profit margins are strong – at double digits – and have been growing as well.

Spritzer has seen a recent expansion in its profit margins after effectively raising prices by reducing water volumes per bottle, which also led to lower logistics costs.

Its profit margins are now in the low double digits (teens) since the bottle redesign in 2022, as opposed to high single digits prior to that.

The company typically capitalises on the main selling point of its mineral water, which contains silica – an ingredient with purported health benefits that can also be found in some health supplements as well.

Following the sustained profit margin growth after the bottle revamp, which also led to overall profit growth, Spritzer’s share price has risen by some 116% from the end of 2022 until the time of writing.

Its compounded annual growth rate (CAGR) for revenue from financial year 2020 ended Dec 31 (FY20), to FY24 grew by 16.96%, slightly lower than the CAGR for net profits at 18.65% over the same period.

Spritzer trades at around 13 times price-to-earnings (PE) ratio, with a market capitalisation of RM1.02bil and dividend yields of 2.5%.

Meanwhile, its close peer, Sabah-based Life Water Bhd, which went public at the end of last year, also reports double- digit profit margins.

Its profits margins are typically in the high teens (above 15%), are even higher than Spritzer’s.

Life Water appears to be growing due to its ability to provide clean, drinkable water access to underserved areas in the state of Sabah, which contributed 98.55% of its revenue in FY24 ended June 30.

The water crisis that Sabah is facing is widely known and has been frequently reported in the news.

This situation does not appear to have been resolved as of yet.

The crisis is considered very serious and has attracted firm criticism from Sabah Umno chief Datuk Seri Bung Moktar Radin over the past several years.

Bung Moktar has previously stated that the water supply crisis affects nearly all districts in Sabah, and that it is being exacerbated by illegal water connections and theft.

He also noted that the issue is not simple to resolve, as old pipes need to be replaced and water treatment plants must be upgraded.

According to Bung Moktar, water shortages are a common issue in the state, burdening both residents and businesses.

Sabah also records one of the highest non-revenue water rates in Malaysia, at between 56% and 60%.

Based on this, it is reasonable to assume that Life Water is capitalising on the opportunities arising from inefficiencies at the state government level, or within the Sabah State Water Department (SSWD), in providing water access.

This dire situation is also highlighted in Life Water’s prospectus, which states that the company has previously experienced – and may continue to experience – frequent disruptions in the public water supply.

These disruptions are due to, among other factors, water rationing, burst pipes, water contamination, and maintenance or repair work on water treatment plants carried out by the SSWD.

However, the company states that it can still maintain supply because it operates more than one manufacturing plant, and water disruptions have not occurred simultaneously at all facilities.

“As such, we were able to continue with production at the other manufacturing plants that were not affected by the public water supply disruptions,” it says.

Life Water also notes that there were numerous instances of public water supply disruptions at its manufacturing plants, with durations ranging from three minutes to five days.

In FY24, Life Water recorded a net profit margin of 16.89%. This compares to 13.66% in FY23, 12.96% in FY22, and 17.06% in FY21.

Sales of drinking water accounted for close to an average of 80% of its revenues between FY21 and FY24.

Life Water is anticipated to grow further if inefficiencies continue at the SSWD.

However, if water supply issues in Sabah are resolved, it is likely that Life Water’s profit margins will normalise in the years to come.

For now, though, the issue does not appear to be going away anytime soon.