DUTCH Lady Milk Industries Bhd’s 9MFY22 results beat expectations, with net profit already surpassing our full-year forecast by 1% and coming in at 91% of the full-year consensus estimate. The key variance against our forecast came from 3Q sales matching that of 2Q, despite the absence of pre-festive buying, signalling the recovery in the general consumption. 

A DPS of 25 sen was proposed cumulating to a DPS of 50 sen (which is in line with our expectation) implying a payout of 131%. 

YoY, its 9MFY12 top line grew 17% on the reopening of the economy, strong Ramadhan sales and price hikes in 2QFY22. However, gross profit only inched up 2% as its gross profit margin saw 4ppts erosion to 30% on elevated diary prices and the high cost of imported inputs on the ringgit’s weakness. PATAMI increased 3% on reduce depreciation and amortisation (-8%). 

QoQ, top line eased by 1% on a stable gross profit margin thanks to the forward purchase of diary raw milk. However, PATAMI jumped 13% thanks to lower operating expenditure (-9%) and effective tax rate of 22% (-2ppts). 

We expect its sales to continue to normalise as the pandemic comes to an end. Meanwhile, the Global Dairy Trade Price Index has been trending downwards since June 2022 back to the CY19 levels, which should boost Dutch Lady’s margins for FY23. 

Post results, we raise our FY22F and FY23F earnings by 16% each to reflect: (i) stronger top lines, and (ii) 1ppt increase in our gross profit margin assumption for FY23 on easing raw material prices. 

Upgrade to ‘Market Perform’ 

from ‘Underperform’. We like Dutch Lady for: (i) the reopening of the economy driving resilient sales, (ii) softening food commodity prices that will ease margin pressures, (iii) its top line stability underpinned by steady demand for staple food items despite the uncertain global economic outlook. 

We raise our TP valuation to RM32.60 (RM28.20 previously) ascribing an unchanged FY23F PER of 22x which is consistent with the industry’s average forward PER. There is no adjustment to our TP based on ESG given a three-star rating as appraised by us. 

Risks to our call include: (i) volatile food commodity prices, and (ii) further weakening of the ringgit resulting in higher cost of imported raw materials. 

Recommendation: Market Perform 

Target Price: RM32.60
by Kenanga Research (Nov 16)