Dutch Lady’s prospects could be looking up

KOTA KINABALU: Dutch Lady Milk Industries Bhd’s (Dutch Lady) prospects could be improving as analysts expect production cost to recover, driven by a stronger ringgit.

Kenanga Investment Bank Bhd’s research arm noted that, in the previous quarters, the group was plagued by margin compressions, which raised concerns over its unfavourable exposure towards Anhydrous Milk Fat (AMF) prices.

“Recent results were viewed to be positive as consistently peaking AMF prices appeared to be undermining the soft skimmed milk powder prices.

“We estimated that milk raw material components consist of 50 per cent skimmed milk powder and 50 per cent AMF.

“Going forward, we are hopeful that production costs will improve, withbackingfromatleastastronger ringgit if not for a correction in commodity price trends,” it opined.

Meanwhile, it pointed out that Dutch Lady’s first quarter of 2018 (1Q18) core net profit of RM37 million (up 11 per cent) came above expectations, boosted by favourable commodity cost exposure.

“We believe effective hedging methods are to be thanked for the recent expansion in gross margin, which was a prior concern following unfavourable global commodity trends,” the research team viewed.

On a year-on-year (y-o-y) basis, Kenanga Research noted that 1Q18 sales of RM266.1 million grew by six per cent possibly driven by an overall recovery in market demand.

It explained: “Gross profit also increased by six per cent, but gross profit margin declined slightly by 0.3pts to 40.7 per cent; we believe effective hedging mechanisms allowed the group to register substantial savings. According to data from the Global Dairy Trade, while the six-month average for AMF during 1Q18 stood at US$6,571 per mt which was circa 20 per cent higher as compared to 1Q17, the average for skimmed milk powder was lower by 25 per cent at US$1,822 per mt.

“Core net profit closed at RM37 million (up 11 per cent) after adjusting for gains and losses from forex and derivatives during the quarter.”

On the company’s quarter-onquarter (q-o-q) results, 1Q18 sales declined slightly (down one per cent) when compared to 4Q17.

“This could be due to seasonality from the Chinese New Year festivities during the quarter, resulting in fewer business days.

“Thanks to better average commodity costs, gross profit margin improved by 4.9pts from 35.8 per cent.

“In terms of bottom-line, net earningsregisteredatRM34.2million (up 63 per cent) following lower tax exposureduringthequarterbutonly grew by 48 per cent after accounting for core adjustments,” Kenanga Research said.

Overall, it pegged a ‘market perform’ rating on the stock.

It said, “Post results, we boost our FY18E/FY19E earnings estimate by 13.1 per cent and 8.1 per cent mainly in anticipation of more favourable raw material costs.”