• Overview. Dutch Lady Malaysia (DLM) 3Q22 revenue and net profit surged by 16.3% and 19.7% YoY respectively powered by i) higher demand for DLM products, ii) full impact of price hikes implementation, iii) effective cost management efforts and iv) lower effective tax rate of 22.2% (-7.3 ppts YoY). Revenue on QoQ basis dropped slightly however or by 0.7% no thanks lower sales volume on seasonality effects.

• Key Highlights. DLM’s gross profit margin improved marginally or by 0.1 ppts QoQ to 28.8% which could have been much lower if not for good cost containment measuresin view of rising input cost (i.e., global dairy) and weak ringgit.

• Against estimates: Above. 9M22’s net profit of RM66.5mn was slightly above our forecast, accounting 82% of our full year forecast though well above consensus at 91%. The positive deviation against our estimate was on the back of better-than-expected top line numbers.

• Dividend. Declared 2nd interim dividend of 25sen, bringing cumulative DPS to 50sen for FY22. DPS declared was in line with our estimates translating into a DY of 1.6%.

• Outlook. We are cautiously optimistic for FY23 given various global headwinds especially inflationary risk and higher interest rates which may exert greater downward pressure on demand which may push consumer to switch to competitively priced substitute products. Nevertheless, given that main commodity prices i.e., skim milk prices and anhydrous milk fat prices have been slowly trending downwards since reaching their peak in 2Q and together with strong cost management, we expect recovery in DLM profit margin for FY23 onwards.

• Our call. Maintain our forecast at this juncture given the risks of a pullback in demand. Reiterate a HOLD call with unchanged TP of RM33.70. Our valuation is DDM-based with a WACC of 7% and TG of 3%, which implies 23x PER for FY23F.

• Upside risk to our call. i) higher-than-expected sales and ii) better-thanexpected margin due to effective cost containment strategy.

Source: BIMB Securities Research - 16 Nov 2022