Analysts turning more cautious on Dutch Lady’s prospects

KUCHING: Analysts are turning more cautious on Dutch Lady Milk Industries Bhd’s ( Dutch Lady) prospects given that milk powder prices have continued to rise.

As per a filing on Bursa Malaysia, Dutch Lady’s nine months to date ended September 30, 2016 profit after tax amounted to RM111.25 million, compared to RM115.76 million the corresponding period of the preceding year.

Dutch Lady’s first nine months of 2016 (9M16) net profit of RM111.3 million was within the research arm of Kenanga Investment Bank Bhd’s ( Kenanga Research) expectation by accounting for 71 per cent of its full-year forecast.

According to Kenanga Research, dividend per share (DPS) of RM1.10 was declared as expected, lifting financial year 2016 (FY16) DPS to RM2.20 which was slightly below the research arm’s expectation ( RM2.40) due to the lower payout ratio.

Looking forward, Kenanga Research opined that that the sustainability of earnings growth still hinges on the price movement of milk powder.

The research arm noted that milk powder prices have continued to rise with skimmed milk powder with whole milk powder prices soaring 35.6 per cent and 54.9 per cent year to date ( YTD) respectively, which is in line with the recovery in global commodity prices.

“Thus, we are turning more cautious on the prospect of the company,” it said.

However, the research arm believed Dutch Lady might still be able to protect the group’s earnings by toning down its brandbuilding investment if the raw material cost overly inflates.

With no changes made to its FY16E-FY17E earnings, Kenanga Research also maintained ‘market perform’ on the stock but with a lower target price.

In view of the more challenging outlook, the research arm trimmed its target price down to RM58.42 per share by pegging a lower price earnings ratio of 22.3-fold to FY17E earnings per share.