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Dutch Lady’s Share Price Gained 304.6% Over 5 Years, What Now?
Corporate Digest | 28 October 2014
By: Shane Goh
Articles (99) Profile

Each time I head to the chilled milk section of a supermarket near my place, I tend to scout for the brand that offers the best value for money (biggest discount) at that moment.

During my trips, I’m always greeted by a lady decked out in a traditional dutch dressing. Despite its European outfit, the company that produces the Dutch Lady brand resides just across the causeway.

Dutch Lady Milk Industries started production with a single product – sweetened condensed milk. It has grown to offer a full range of dairy products and fruit juices for the Malaysian and export market such as powdered milk, cultured milk and yoghurt. Its brands include Dutch Lady and Friso.

The firm’s ultimate holding company is Royal FrieslandCampina, one of the largest milk companies in the world. As of 31 December, the latter owns a 51 percent stake in Dutch Lady.

In 2013, Dutch Lady brand was number one in both value and volume in the infant, follow on and toddler powdered milk category in Malaysia. In 2011, the borneo post stated that the firm was the market share leader in the “growing up” milk segment with the Dutch Lady brand holding 40 percent of the market share.

Since 28 October 2009, the firm’s share price has soared 304.6 percent from RM11.40 to close at RM46.12 five years later.

Growing Dairy Demand Attracts Exporters

According to a June 2013 report by Rabobank, dairy consumption is expected to grow 2.4 percent in the ASEAN-6 (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) markets each year through to 2020.

Following China, the region is expected to post the second fastest annual growth rate. The growth rate implies that the region will import 14 billion litres per year by 2020, compared to 11 billion litres in 2012.

However, on a per capita basis, dairy consumption rates in the region still lag developed countries. In 2012, Malaysia’s consumption rate was 51 kilograms (kg), compared to 85 kg per capita in Japan.

Despite structural challenges such as price controls, quotas, import permits and certificates, Rabobank reckons that dairy exporters have advantages over local rivals in terms of superior supply chain security, healthier food safety history, and a wider, more innovative range of products.

A range of Dutch Lady's products

Impressive Financials

Over the past 10 years, Dutch Lady has posted a 9.9 percent compound annual growth rate in revenue to hit RM982.7 million in FY13. Gross margin has improved from 32.5 percent in FY04 to 38.1 percent in FY13. Operating and net margins have enjoyed similar experiences, expanding from 6.5 percent and 4.7 percent in FY04 to 18.7 percent and 14.1 percent in FY13 respectively.

On the balance sheet front, apart from a RM16.4 million short-term loan taken out during FY07, which was subsequently cleared, Dutch Lady appears to carry zero debt. However, I caution against RM3.3 million in finance costs recorded in FY13’s income statement. Without speaking to the management, I am unsure where this figure came from.

While net interest income has been positive over the past five full fiscal years (a good thing), finance costs have increased from RM0.9 million in FY11 to RM3.3 million in FY13. If it continues to rise, it may eventually overtake Dutch Lady’s interest income and weaken its net profit margin.

Cash flow-wise, Dutch Lady has boasted 10 consecutive years of positive operating cash flow. The firm has been paying dividends consistently during that period with a payout ratio that ranged from 11.9 percent (FY08) to 51.9 percent (FY12).

Cost Challenges

Despite the expansion in margins over the past few years, a recent rise in dairy raw material costs, increase in fuel prices, electricity tariffs and weakening Ringgit have dampened the firm’s financial performance.

In the latest quarter ended 30 June, net profit fell 29.8 percent to RM24.3 million despite a 7.4 percent improvement in revenue to RM268.2 million as gross and operating margins shed 6.3 and 5.8 percentage points to 32.5 percent and 12.8 percent respectively.

Looking ahead, the impending implementation of the goods and services tax in April 2015 may potentially reduce consumer spending and curb the growth in Dutch Lady’s top line.

SI Research Takeaway

Not blessed with a discerning palate, most milk brands taste the same to me. As such, I opt to buy the brand that is easiest on my wallet. This means that milk is a price-sensitive product without much brand loyalty.

However, I reckon that consumers would continue to drink milk over the next few decades. And once consumed, the milk has to be repurchased. This creates a recurring nature of spending on the good, which is a positive sign for shareholders.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.


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