Dutch Lady’s 1H17 earnings dragged by cost push factors
KUALA LUMPUR: Dutch Lady Milk Industries Bhd’s (Dutch Lady) net profit for the first half of 2017 (1H17) of RM64.2 million came in below expectations of Kenanga Investment Bank Bhd’s research arm (Kenanga Research), making up only 44 per cent of their full-year earnings estimate.
In a company update, the research arm attributed this negative deviation as a result of stronger-thanexpected impacts from rising commodity prices which led by unfavourable foreign exchange (forex) rates.
In particular, they cited that higher milk powder prices were a main issue as the commodity saw a 48.75 per cent increase in price from US$2,092 per metric tonne in 1H16 to US$3,112 per metric tonne in 1H17.
This was further exacerbated by the deteriorating ringgit at an average of 4.10 per US dollar in 1H16 and 4.39 in 1H17.
While the costs push factors dragged earnings, the research arm did note that 1H17 revenue of RM513.6 million had increased by 4 per cent on the back of higher demand of dairy products on Hari Raya festivities.
This was however not only off-set by cost push factors but also a 11 per cent decline in operating profit to RM84.6 million, which was aggravated by heavier marketing expenses.
Looking forward, things are anticipated to take a slight turn as milk prices appear to be moving sideways at a more favourable base.
“We believe this could help margins to recover to more palatable levels, notwithstanding further weakness in forex exposure,” said the research arm.
All things considered however, the research will still be cutting theur FY17-18E assumptions for the group by 3.3 and 2.3 per cent as they adjust for thinner profit margins led by higher average raw materials costs.
Kenanga research maintains its ‘market perform’ rating on Dutch Lady’s stock with a lower target price of RM54.15, based on their revised FY18E earnings per share of 242.9 sen against an unchanged targeted 22.3 fold price earnings ratio.
“While we have adjusted our FY17E dividend per share to 220 sen from 240 sen in line with the weaker results, we believe the pay-out of slightly above 100 per cent of net earnings is possible based on the group’s track record,” concluded the research arm.