• Downgrade to HOLD (TP: RM34.00). Dutch Lady’s (DLM) 1QFY24 core net profit of RM36.3mn exceeded our and consensus full-year estimates, accounting at 33% and 38% respectively. The deviation from our forecast was mainly due to lower-than-expected operating costs. The higher core net profit of +166.2% YoY was driven by increased product prices and lower dairy raw material costs. We remain positive on DLM’s outlook, underpinned by stable demand inelasticity of their products and long-term growth prospects from the new Bandar Enstek factory. Consequently, we have revised our 2024F/2025F earnings forecasts upward by 20%/10% to account for lower costs. In tandem, our DDM-derived TP has increased to RM34.00 (from RM27.00), based on a WACC of 7.5% and a TG of 2%. However, we downgrade to HOLD due to limited upside potential and the 41% YTD share price rally, which we believe has fully factored in the earnings growth prospects. A first single-tier interim DPS of 25sen was declared with a payout of 44% to core EPS.

• Key Highlights. DLM’s 1QFY24 revenue rose by 2.4% YoY to RM362.8mn, mainly due to carry-over price hikes from 2023 and a specific product price increase in this quarter. Core net profit jumped by 166.2% YoY, thanks to higher revenue and lower overall operating costs, especially dairy raw material costs. Nevertheless, on a QoQ basis, core net profit dropped by - 33.7%, affected by a lower-priced product mix, seasonal promotional costs, and an unfavourable exchange rate.

• Earning Revision. We have upgrade our 2024F/2025F earnings forecast by 20%/10% to factor in lower operating cost assumption.

• Outlook. We are positive on DLM due to its stable earnings growth driven by consistent demand, stabilising dairy raw material costs, and improving operational efficiency. Additionally, DLM demonstrates its capability to manage rising costs through price adjustments, thanks to its strong brand equity in the market. Long-term earnings growth prospects will be supported by its new factory in Bandar Enstek, Negeri Sembilan, which will offer higher production capacity and improved efficiencies.

Source: BIMB Securities Research - 28 May 2024