‘Higher raw material costs factor in Dutch Lady’s price increase’
Dutch Lady Milk Industries Bhd’s (Dutch Lady) selling price increase over the range of its products was a neceassary measure, in analysts’ view.
According to the research arm of Kenanga Investment Bank Bhd’s (Kenanga Research), the group has increased its selling price over the range of its products in June 2014; the second round of price hike in 2014 since January.
“We reckon that the price increase is necessary to factor in the higher raw material prices, but the quantum of the price increase was undisclosed,” the research arm opined.
Meanwhile, it noted that the group has also downsized its ready-to-drink (RTD) UHT milk to 200ml per pack from 250ml per pack previously in a strategy to mitigate the impact of the price increase on the consumer.
Kenanga Research highlighted that Dutch Lady expects minimal impact from the price increase to the child nutrition segment, particularly the premium brands and early life stage range of products (0-12 months) due to the low price elasticity as compared to other products.
“For the beverages segment, the group expects demand to be sustained by the rising health awareness as the average consumption of Malaysian is low at two servings per week versus two servings per day recommended by World Health Organization (WHO), which suggest room for improvement,” the research arm said.
As for the raw material prices, Kenanga research noted that whole milk powder (WMP) price has retreated from the year-high of US$5,000 per mt in the first quarter of 2014 (1Q14) to below US$3,000 per mt level in September 2014 while the skimmed milk powder (SMP) price has also followed suit.
It said that management attributed the decline in milk powder price to the high stock level in China, one of the biggest consumers in the world; and the impaired business link to Russia on the back of economic sanctions.
“Thus, we expect the earnings margin to recover on the back of lower raw material prices.
“We are forecasting gross margin of 32.9 per cent in financial year 2014 (FY14) versus 32.5 per cent achieved in the first half of 2014 (1H14),” the research arm projected.
Kenanga Research revisited its earnings model and imputed the latest round of price increase into its earnings forecast.
As a result, the net profits for FY14E and FY15E were nudged higher by 2.9 per cent and 4.4 per cent, respectively.
Post earnings revisions, it highlighted that FY14E earnings per share (EPS) still represents a negative growth of 18.7 per cent while FY15 EPS is forecasted to grow 13.9 per cent.
All in, Kenanga Research Maintained “UNDERPERFORM” on Dutch Lady with a higher Target Price of RM44.22 per share from RM42.32 per share previously.
“While, the price increase is positive to the earnings growth, we do not think that the growth can be healthily supported by volume growth in view of the weak consumer spending, although dairy products are less discretionary in nature,” it opined.
Meanwhile, the research arm noted added that dividend yield is below five per cent level which it thinks is not enough to compensate for the risk of the volatile movement of raw material prices and weakening consumer sentiment with the imminent implementation of goods and services tax (GST) in April 2015.