• Overview. Dutch Lady recorded a better 3Q20 revenue of RM286.8 (+4.9% qoq, +3.8% yoy), bringing 9M20 revenue to RM811.5m (+3.4% yoy) which accounts 74% of our full year forecast. This was mainly due to better consumer spending on non-discretionary product during the RMCO environment and Raya Haji festival. The company also allowed to operate at full capacity during the quarter.

• Key highlights. While the topline numbers appear to be broadly inline with forecast, the negative surprise is its PBT declined by 56% qoq and 65% yoy on the back of higher commercial spend, distribution and other operating expenses amidst a spike in global dairy raw material prices.

• Against estimates: Below. 3Q20 net earnings dropped to RM9.2m (- 57% qoq, -53% yoy), making up 47% of our full year expectations. We cut our earnings FY20-22F forecast by 34%-33% against previous forecast as we input higher raw material cost and challenges in food service business environment ahead. Profit margin was compressed to 3.2% during the period against 7.8% in 2Q20.

• Outlook. RMCO period revived consumer spending pattern, as consumer gradually adapt to a ’new normal’ shopping practise. Nonetheless, as the third-wave of Covid-19 cases rise recently, near and long-term F&B business becomes challenging in our view. Additionally, we saw the main raw material – milk skim powder average price has increased from 2,226 US/MT to 2,480 US/MT approximately +11% qoq during the quarter. Putting this into perspective, we estimate profit margin expected for FY20-FY22 to be lower at 7% from 10%-11% previously.

• Dividend. A total of 40 sen DPS totalling RM25.6m has been declared and would be paid on 24th Dec 2020.

• Our call. We maintain HOLD call with a new DCF-derived TP of RM34.50 (from RM37.00) based on (WACC of 6.8%). This implies FY20F/FY21F PE of 30x/28x

Source: BIMB Securities Research - 27 Nov 2020