• Overview. Dutch Lady Malaysia (DLM) 2Q22 revenue increased encouragingly by 13.4% QoQ and 19.7% YoY thanks to strong demand for milk, successful Ramadhan campaign and sales as well as an increase in selling prices. It was a contrast for net profit however after it jumped by only 4.7% QoQ, and declined by 21.1% YoY due to higher input cost especially dairy. This was further dragged by weakening Ringgit against the USD which pushed profit margin to drop by 0.5 ppts QoQ and 3.3 YoY to 6.3%.

• Key Highlights. Though skim milk powder prices have peaked in April following a jump of c.35% YoY and c.60% pre COVID-19 - we still expect DLM margins to remain challenging in the near term especially in 3Q22 as global dairy prices are expected to remain elevated into 2023. This will be further added by the downside risk of Ringgit and therefore, overall margin in 2023.

• Against estimates: Inline. 1H22’s net profit of RM42.1mn was within our and consensus forecast, accounting 52.5% and 47.4% of full year forecast respectively. No dividend was declared during this quarter but as to date they have paid 25 sen DPS. We estimate a total FY22 DPS of 50 sen (c.40% payout), translating into a DY of 1.5%.

• Outlook. Near term earnings outlook to remain challenging. DLM focus is to provide nourishment to Malaysians at affordable prices, hence we believe price hikes would be limited and insufficient to offset the current elevated commodity costs. We are cautiously optimistic for FY23 given various global headwinds especially inflationary risk and the aggressive interest rate movement in Advanced Economies (AEs) which may cap the upside potential of Ringgit.

• Our call. Maintain our HOLD call based on DDM-derived TP of RM33.70 (WACC: 7%, TG: 3%). This implies 23x FY23F PE (close to DLM’s -1SD 5- years average forward PE). Our valuation is justified as margins will be challenging on the back of higher raw material prices coupled with uninspiring dividend yield.

Source: BIMB Securities Research - 24 Aug 2022