Dutch Lady’s (DLM) 1HFY23 core net profit of RM41.7mn was in line with our and consensus’ expectations, accounting for 55% respectively. The increase in 2QFY23 core net profit to RM28.1mn (+106% QoQ, +9.9% YoY) was primarily driven by higher sales and lower overall operating costs, attributed to factors such as lower raw materials prices and effective cost containment. Consequently, margin rose to 8% (+4.1 ppts QoQ, +0.5ppt YoY). We are positive on DLM’s outlook, underpinned by sustained demand for dairy products and the downward trend in raw material prices. Upgrade our call to BUY with unchanged DDM-derived TP of RM25.00 (WACC: 7% and TG: 2%). Currently, the stock trades at an attractive valuation of 16x FY24F PE (below DLM’s -1SD 5years average forward PE).

• Below expectations. DLM’s 1HFY23 core net profit of RM41.7mn was in line with ours and consensus expectations, accounting for 55% of the full year forecast respectively.

• QoQ. DLM’s 2QFY23 revenue slipped marginally by -0.9% QoQ to RM351.2mn mainly due to lower sales post 1Q23 Ramadhan sell-in. Despite lower revenue, its core net profit surged by +106% QoQ to RM28.1mn, driven by favourable product mix margin, softening in dairy raw materials prices, and effective cost containment. The core net profit margin increased by +4.1 ppts YoY to 8%.

• YoY. Revenue increased by 3.3% YoY, primarily driven by strong demand for dairy products, successful Festive campaigns, and selective product price increases. In tandem, core net profit increased by 9.9% YoY, mainly due to reduced overall operating costs.

• Outlook. We are positive on DLM’s prospect as demand for dairy products expected to remain resilient despite uncertainty in global economic outlook. Margin expected to remain stable 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 mid2022 (dropped c.20-30% YoY) and together with cost control initiative.

• Our call. We maintain our forecast and TP unchanged at RM25.00 based DDM methodology (WACC of 7% and TG of 2%). This implies 21x FY24F PER, which close to DLM’s 5-years average PE. We upgrade our call to BUY from HOLD, as the share price has fallen by 40.7% YTD. Additionally, the current stock trades at an attractive valuation of 16x FY24F PE, suggesting a good entry point for investors.

• Risk to our call. i) lower-than-expected sales and ii) unprecedented surge in raw material prices.

Source: BIMB Securities Research - 25 Aug 2023