• Dutch Lady’s 1Q18 net profit of RM34.2m was in-line with our full year estimate making up 24.5%.

• Earnings grew 7.2% yoy and 63.2% qoq mainly driven by higher revenue and lower input cost in current quarter.

• Expect FY18 outlook to improve on strengthening consumer sentiment and ringgit supported by better operational efficiency.

• HOLD recommendation with higher DCF-derived TP of RM65.00 (WACC: 7.5%) after we re-look and roll over valuation to FY19.

Earnings aligned with expectation

Dutch Lady’s 1Q18 registered higher net profit of RM34.2m (+7.2%) which is within our expectation. The increase was driven by higher revenue (+6.4% yoy) and lower operating costs. As a result, EBIT margin gained 0.9 ppts to 17.6%.

Higher qoq performance

On qoq basis, revenue fell slightly by -1.1% on shorter selling days given the Chinese New Year (CNY) period. We also believe consumer spending trend during the period was more focused on discretionary items. Despite this, net profit improved by 63.2% mainly due to higher incidental cost in 4Q17 as well as current quarter’s lower input cost coupled with a favourable exchange rate. These resulted in GP margin increasing to 40.7% (+4.9 ppts).

Outlook expected to recover in FY18

While the outlook is still challenging due to the stiff market competition, we expect earnings to recover in FY18 contributed by a stable top line growth in line with the improvement in consumer sentiment (+8.4 qoq) and stronger ringgit. The ringgit could mitigate the increasing trend in raw materials prices. Recently, both Milk Powder and Anhydrous Milk Fat prices had increased by c.12% and c.10% since Jan 2018. Additionally, low distribution expenses from better operational and manpower management could lead to higher cost savings. Overall, we expect margin to improve to 16.8% from 14.8% in FY17.

HOLD with new TP RM65.00

We believe the company’s strong brand name is positive. Its continued efforts to defend market share ensures its brand equity remains strong. We upgrade to Hold with higher TP of RM65.00 from RM59.20 (WACC: 7.5%) as we re-look at our DCF valuation and roll over to FY19.

Source: BIMB Securities Research - 26 Apr 2018