• Dutch Lady’s FY17 net profit of RM117.7m was below our full year forecast making up only 86%.

• FY17 profit declined by 21% yoy due to high input costs despite slightly higher revenue of 1.6%.

• 3Q17 net profit decreased by 35.6% due to higher operational costs offsetting lower raw material prices

• We adjust our FY18 and FY19 net profit forecast lower by 6.7% and 6.8% respectively to reflect the higher operating costs. Downgrade to SELL with lower DCF-derived TP of RM59.20 (WACC: 8%).

Earnings impacted by higher input costs

Dutch Lady’s FY17 registered lower net profit of RM117.7m (-21%) despite a 1.6% revenue growth. The decline was mainly due to higher input costs arising from higher global dairy prices and weak ringgit. As a result, GP margin fell 4.7ppts to 37.7% (vs FY16: 42.4%).

QoQ earnings dropped due to mixed factors

As for qoq, net profit dropped 35.6% due to lower revenue (-4.5%) as well as higher operational costs and unfavourable revaluation of derivatives. This offset the lower raw material costs as global dairy prices fell c.13% qoq. Overall, EBIT margin fell 4ppts to 14.8%.

Dividend declared for FYE18

Total DPS of 280sen was paid for FY17 giving a dividend yield of 4%. A standard single-tier interim dividend of 50sen and special single tier interim dividend of 60sen was declared for FYE18 (same as FY17) and to be paid on 25 May 2018.

Outlook remains challenging

Going forward, outlook remains challenging but Dutch Lady could benefit from lower raw material prices and strengthening ringgit. As reported by Global Dairy Trade, the trend in current milk powder prices have been trading at a lower level averaging USD1,832/MT as at 20th February, a drop of c.30% from highest in Jan 2017 (USD2,621/MT). However, expected increase in other operating costs such as higher A&P costs and investment in product innovation to sustain sales and market share amidst stiff competition could slightly impair the gains obtained.

Downgrade to SELL with new TP of RM59.20

We pare down our FY18 and FY19 earnings forecast by 6.7% and 6.8% respectively due to higher operating costs than expected. We downgrade the stock to SELL with a lower DCF-derived TP of RM59.20 from RM60.00 (WACC: 8%) which implies FY18F PE of 27x.

Source: BIMB Securities Research - 28 Feb 2018