1.

0 Introduction

Spritzer Berhad is integrated as the leading water bottled manufacturer in Malaysia. Mainly,
the company is engage in the production of natural mineral water, distilled water, and
carboyhdrate water. For 7 consecutive years, the company has been awarded as Bottled
Water Company by Frost & Sullivan Asia Pacific. By the end of financial year on 31 May
2016, the companys revenue has grew strongly by 14% from RM 254 million in 2015 to RM
288 million. The strong growth of the revenue was due to higher sales volume and
improvement in average selling prices of the products. In addition, the profit attributable to
shareholders has also increased significantly by 25% from RM 22.8 million in 2015 to RM
28.5 million (Annual Report, 2016). Thus, the main objective of this report is to analyse and
evaluate the financial data of the company in terms of its dividend policy, capital structure,
debt policy, and shares price valuation to continue maximizing the shareholders value.

2.0 Dividend Policy

2.1 Dividend amount and payout ratio

Financial Year Ended 31 May 2016 2015 2014 2013 2012

Dividends paid per share (sen) 5.5 5.0 4.0 4.0 3.0

Basic earnings per share (sen) 19.5 16.6 16.3 14.7 8.1

Dividend payout ratio

28.21% 30.12% 24.54% 27.21% 37.04%
= (Dividens per share / earnings per share)

*The formula of Dividend Payout Ratio = (Dividends Paid / Earning per share) x 100

The table above shows the calculation of Spritzers Dividend payout ratio from 2012-2016.
Based from the result, the trends of Dividens paid per share is rising slightly year by year.
Same thing happened to the Earnings per shares trends, as the number is rising significantly
from 8.1 in 2012 to 19.5 in 2016. However, the trend of Dividend payout ratio turned out to
be varied with over 20% for the past 5 years. It indicates that the payout ratio was at
sustanaible trends, which means Spritzer will continue to give at least 20% of its profit to the
shareholders.
2.2 Reasons behind the trend of the dividend payment/payout ratio

Financial Year Ended 31 May 2016 2015 2014 2013 2012

Dividends paid per share (sen) 5.5 5.0 4.0 4.0 3.0

Share Price (RM) 2.57 1.93 1.80 1.42 0.83

The table above shows that both Dividends paid per share and Share price was on increasing
trend. However, the format of increasing trend was different as seen in 2013 and 2014.
During this period, the Dividens paid per share was constant at 4.0 sen, whereas the Share
price was increased from 1.42 to 1.80 sen. Thus, there was a relationship between Dividends
paid and Share price. It was in accordance with Bird in the Hand Theory supported by
Gordon-Lintner (1962), rather than Dividend Irrelevance Theory which supported by
Modigliani-Miller (1961). The reason behind this event was the purchase of plant, property
and equipment to upgrade and expand companys manufacturing facilities with a total of RM
23.7 million. Therefore, these expansion strategy indeed has made the shareholders feel safe
even with lower rate of dividend along with higher share price.

2.3 Literature review on each of the dividend policy

As mentioned on the previous section, the dividend policy of Spritzer was in accordance with
Bird in the Hand Theory supported by Gordon-Lintner (1962). This theory explained that
equity or value of the company will go down if the dividend payout ratio increased. As
investors are less confident about the acceptance of capital gains resulting from retained
earnings, rather than receive a dividend. Gordon and Lintner (1962) found that investors are
much appreciate the expected income from dividends than expected revenues from capital
gains. Marchetti, Castelli, and Sanvito (2014) added that providing a high dividend will also
make the company's share price higher, which will affect the value of the company. While,
the cost of the company's equity will increase if the dividend is reduced. Thus, a company
can establish a high dividend payout ratio and offer high dividend yields in order to minimize
the cost of capital. In addition, the dividend payout ratio is a sign for investors, where a very
large dividend increase indicates that the management is optimistic on the future of the
company (Lanber, 2013).
Meanwhile, the Dividend Irrelevance Theory stated that If dividend policy has no effect on
the company's share price, the dividend policy does not have a significant influence, then it is
not relevant (Modigliani-Miller, 1961). Moreover, Shrestha (2013) added that dividend
policy does not affect the share price and shareholders wealth. Rather, the company's value
is determined by the earning power and assets of the company. Thus the value of a company
is determined by investment decisions. Meanwhile, the decision of whether profits will be
distributed as dividends or be detained does not affect the value of the company at all.

2.4 Recommendation

Since Spritzer listed in bursa Malaysia back in 2000, the company has consistently paid out
annual cash dividends to its shareholders. As stated in the 2016 annual report, Spritzer will
continue to reward its shareholders with appropriate dividend payout which in line with the
companys earnings and cash flow requirements. With this flexible dividend policy, the
company will have to determine the amount of dividend payout ratio adjusted each year with
the financial position. According to Frankfurter, Wood, and Wansley (2003), this policy may
create doubt to investors in terms or company performance. Because, with this policy the
dividend payment per share is unstable. Therefore, I recommend that Spritzers management
should change its dividend policy into stable dividend policy. This stable dividend policy
means that the dividend will be given regularly per share for a certain period, despite
fluctuating profits from the company for several years. Then when profits increase, the
dividend will also be increase to further maintained for several years. If this policy applied,
then (1) the share price could go up, because dividends are stable and predictable which
considered to have a small risk, (2) could give the impression to investors that the company
has good prospects in the future, (3) will attract investors who take advantage of the dividend
for the purposes of consumption, because dividends are always paid (Omerhodi, 2014).
3.0 Capital Structure

3.1 Companys D/E Ratio

Financial Year Ended 31 May 2016 2015 2014 2013 2012

Total Non Current Liabilities (Debt) RM'000 25,427 24,488 33,913 36,383 50,408

Total Non Current Liabilities + Total Equity

284,247 240,034 221,705 203,401 200,615
(Equity) RM'000

D/E Ratio 8.9% 10.2% 15.3% 17.9% 25.1%

*Formula of D/E Ratio = Non Current Liabilities/(Total Equities + NCL)

Basically, D/E ratio is the relative size of debt to equity, where the greater the debt ratio, the
greater use of debt to finance the companys operations, relative to equity financing. As seen
from the table above, the trends of Spritzers D/E Ratio is decreasing year by year from 2012-
2016. It means that Spritzer has become more independent year by year, and did not rely
much on the creditor to finance its operations.

3.2 Factor that exhibit such levels of D/E Ratio and relevant theories

Financial Year Ended 31 May 2016 2015 2014 2013 2012

Revenue RM'000 288,226 253,667 238,750 201,935 178,208

The decreasing trends of Spritzers D/E Ratio indicates that the company was performing
very well year by year. One of the factors that contribute the decrease of companys D/E ratio
is the increase on the Revenue year by year. In addition, companies that have high growth
rates are likely to use external sources of funding. Another reason is the cost of issuing shares
is usually more expensive than the cost of issuing bond (Melnik, 2003). As stated in the 2016
annual report, the revenue has increased significantly from RM 178,208 thousand in 2012 to
RM 288,226 thousand in 2016. The company with high profitability will use a smaller debt
because the company is able to provide sufficient funds through retained earnings. Thus, the
theory of Pecking Order which stated by Myers (1984) is the most relevant theory that
explained such levels of Spritzers D/E ratio.
3.3 Literature Review on Capital Structure

As discussed in the previous section, the most relevant theory that explained Spritzer Bhd
capital structure is Pecking Order theory. According to Myers (1984), this theory stated that
Companies with a high level of profitability, will have low debt levels, because high
profitability companies have plentiful internal funding sources. In the pecking order theory
there is no optimal capital structure. Specifically the company has a sequence preference in
the use of funds. Shyam-Sunder and Myers (1999), tested the theory by analyzing the
relationship between internal funding deficit with erratic levels of corporate debt. They found
out that both variables has a relationship, which indicates that the internal funding deficit will
always be financed through debt, and share is not an alternative external funding that will be
selected by company. However, there are companies that use the funds for the investment
requirements that does not in accordance with Pecking Order theory. Research conducted by
Singh and Hamid (1992) found that most of the companies in developing countries are prefer
to issue equity first rather than debt as sources of financing. This is contrary to the pecking
order theory which states that the company will choose to first issuing debt rather than issue
shares when the companies need external funding.

3.4 Recommendation

Generally speaking, the current capital structure policy implemented by Spritzer Berhad was
excellent so far, as the D/E Ratio keep decreasing year by year. According to William H.
Payne (2004), this capital structure focuses on equity capital for the consideration that the use
of debt financing contain a greater risk than the use of its own capital. In addition, financing
with equity capital will lead to the opportunity cost and the control of the company. However,
the return generated from the shares is uncertain and shareholders are the first to bear the risk
of the company. Therefore, an optimal balance between equity and debt must be established
which means the company should not have a debt that is greater than the amount of their own
capital. According to the cost of capital concept (Akrani, 2011), companies should strive to
achieve an optimal capital structure to minimize cost of the average capital utilization.
Whereby, the average cost of capital depends on the proportion of each source of funds.
Thus, I recommend that the management should continue this capital structure as long as they
can maintain the low D/E Ratio.
4.0 Company Valuation

4.1 Companys Share Price

Financial Year Ended 31 May 2016 2015 2014 2013 2012

Share Price (RM) 2.57 1.93 1.80 1.42 0.83

Earnings per Share (EPS) sen 19.5 16.6 16.3 14.7 8.1

Price-earnings Ratio 13.2% 11.6% 11.0% 9.7% 10.2%

*Formula of P/E Ratio = Share Price / Earnings Per Share

Basically, Price-earnings ratio measures how much investors are willing to pay for each
dollar of reported earnings. Based from the calculation above, the trends of Price-earnings
ratio of Spritzer during 2012-2016 was erratic within the range of 9%-14%. Although, both
share price and earnings per share during the period was increasing annualy.

4.2 Reasons behind the trend of companys share valuation

The reason behind the increase of the share price was due to the acquisition of plant, property
and equipment. Along with companys ongoing upgrading and expansion plans to the global
market. According to Timothy P. Connolly (2012), High Price-Earnings Ratio does not
necessarily always reflect a good performance, because high P/E Ratio could have been
caused by the average companys profit growth. High P/E Ratio indicates good prospects on
the share price, but the risk is higher. Meanwhile, low P/E Ratio can also mean higher
corporate earnings and dividend potential is also high. Fundamentally, this ratio is used by
investors in selecting shares. If companies have high P/E Ratio, then it indicates higher
market value for the shares. So, shares will be in demand by investors and it will ultimately
have an impact on share prices. However, if the company has a low P/E Ratio, it indicates a
lower market value. So, the share price will be declined (Cerrone, 2011).
4.3 Competitor in the same industry

Share Price (RM) 2016 2015 2014 2013 2012

Spritzer Berhad 2.57 1.93 1.80 1.42 0.83

F&N Berhad 5.43 5.12 4.62 4.52 4.28

As compare to Fraser & Neave Holdings Bhd, although the trend of share price was the same
which is increasing, but the share price of F&N in 2016 was higher than Spritzer with RM
5.43 per share compare to RM 2.57. It was because F&N has various products includes
isotonic drink, fresh milk, and fruit juice. Whereas, Spritzer mainly focused on mineral water.

4.4 Compare the valuation of company and competitor and discuss companys valuation

In terms of the comparison, F&N has higher valuation than Spritzer as the share price is
higher and the F&N revenue in 2016 is RM 4.17 billion. But, both companies is in growth
stage as seen from the share price. According to Alfred Rappaport (1987), the higher the
share price the higher the value of the company. High value of the company will attract
shareholders to own parts of the company, because high value indicates prosperity to
shareholders also high. Shareholders value and value of company presented by the market
price of the shares, which is a reflection of the investment decision, financing , and asset
management. However, higher share price does not always mean higher value of the
company. According to Buzzell, Gale, and Sultan (1975), the circulated shares do not
represent a 100% of a company. Whereas, it could be a 20% of total company shares to the
public, the remaining 80% owned by private investors. 20% ownership of the company is
referred as minor ownership (minority interest).