Dutch Lady’s (DLM) 1Q23 core net profit of RM13.6mn came in below our and consensus’ expectations, accounting for only 14.5% and 15% of full year forecast. Core net profit dropped by 45.5% YoY, hurt by higher operating cost. DLM declared DPS of 25 sen and we estimate a total DPS of 50 sen for FY23, translating into a yield of 1.9%. Outlook for FY23 remains challenging given prevailing inflationary risk, but we expect margin to slowly recover from 2H23 onwards backed by softening in dairy raw materials and ongoing cost control initiative. We cut our FY23/FY24 earnings forecast by 25%/20% and maintain a HOLD call with a lower DDM-derived TP of RM25.00 (WACC: 7% and TG: 2%).

• Below expectations. DLM’s 1Q23 core net profit of RM13.6mn (-45.5% YoY) trailed our and consensus’ expectations, accounting for only 14.5% and 15% of full year forecast. The deviation against ours was mainly due to higher-than-expected operation costs.

• Dividend. A first single-tier interim DPS of 25 sen was declared. We estimate a total DPS of 50 sen for FY23, translating into a yield of 1.9%.

• QoQ. DLM’s 1Q23 revenue slipped by 2% due to changes in the mix of sold products and stagnant demand. Despite lower revenue, its core EBIT jumped by 40% QoQ driven by softening in dairy raw materials prices and good cost containment, in our view.

• YoY/ YTD. Revenue increased by 18.2% YoY, mainly driven by higher sales volume (+15% YoY) and an increase in selling prices. The jump in sales volume was on the back of continued strong demand for dairy products and successful Festive campaigns. Nevertheless, core net profit dropped by 45.5% YoY mostly due to higher operating cost especially dairy raw materials cost and unfavourable currency movement. Hence, core net profit margin fell by 4.5 ppts YoY to 3.8%.

• Outlook. DLM outlook remains challenging given inflationary risk and higher interest rates environment which may exert downward pressure on demand. This could push consumer to switch to competitively priced substitute products. Nevertheless, given that their main commodity prices i.e., skim milk prices and anhydrous milk fat prices have been slowly trending downwards since their peak in mid-2022 (dropped c.20- 30%) and together with cost control initiative, we expect DLM margin to slowly recover from 2H23 onwards. Note that, DLM typically holds 6 months’ worth of inventories.

• Forecast. Following a less-than-inspiring results, we have revised our FY23/FY24 earnings forecast downward by 25%/20% in line with our new operation cost assumptions.

• Our call. Maintain a HOLD call with a new TP of RM25.00 (from RM33.70 previously). Our valuation is DDM-based with a WACC of 7% and TG of 2%, which implies 21x PER for FY23F.

Source: BIMB Securities Research - 26 May 2023