• Overall, FY18 net profit of RM129m lagged our forecasts at 93% but was inline with consensus at 98%.
• Its core profit increased 10% yoy due to lower input costs despite negative revenue growth.
• A rather disappointing lower total DPS overall with 200sen compared to 280sen in 2017.
• We maintain Hold recommendation with an unchanged DCFderived TP of RM65.00 (WACC: 7.6%).

Profits increased aided by lower input costs

Dutch Lady’s FY18 net profit grew 10% to RM129m (FY17: RM118m) which is below our full year forecast at 93%. Revenue for the year declined to RM1,048m or -1.5% yoy. We believe the positive earnings growth was mainly due to lower input costs, namely milk powder price which has decreased 13% in 2018 as opposed to the previous year. As a result, EBIT margin gained 1.8 ppts to 16.6%.

Weaker qoq profit performance

On qoq basis, PBT declined by 14.7% to RM39m attributed to increase in milk powder price by 4% in 4Q18. In addition, weakening of ringgit exacerbated the cost increase. Consequently, net profit declined by 11.4% to RM30.3m with NP margin softening to 11.2% (-2.1 ppts). Revenue for the quarter grew by 5.5% driven by volume growth of 3% compared to 2017. This is attributed to the company’s effort of investing in strategic pricing to ensure product affordability.

Dividend declared for 2018

A total DPS of 200sen was declared for 2018 giving a dividend yield of 3% in comparison to 2017 with 280 sen with yield of 4%.

Neutral outlook

While the outlook is still challenging due to the stiff market competition, we believe the company’s strong brand name and its continued efforts in successfully defending its market share ensures its brand equity remains solid. Overall, we estimate the slight strengthening of ringgit (as raw materials are imported is USD) would help improve FY19’s margin to 12.9% from 12.3% in FY18 as Dutch Lady benefits from lower input costs.

HOLD with TP RM65.00

No adjustment made to our earnings forecast. We retain our Hold recommendation with DCF-derived TP of RM65.00 (WACC: 7.6%).

Source: BIMB Securities Research - 28 Feb 2019