News    The Star reported that Danone Dumex (M) recalled limited batches of its products as a precautionary measure to safeguard consumers due to fears over bacteria contamination after Fonterra (the supplier) informed that one of their ingredients could have been contaminated with the botulism bacteria. 

Furthermore, it was reported that Fonterra had exported the contaminated whey protein concentrate to China, Malaysia, Vietnam, Thailand and Saudi Arabia. 

Comments     We understand that Fonterra is also one of the suppliers of Dutch Lady Milk (“DLADY”).

However, we have clarified with the management and confirmed that DLADY’s products are safe as they are not contaminated with botulism bacteria. This is because they do not use Fonterra WPC80 in any DLADY products, which include Dutch Lady, Dutch Lady ActivGold and Friso. 

On the contrary, we do not rule out the possibility that DLADY may actually benefit from this scare as its competitor Dumex withdraws some of its products (the main competitor to DLADY’s infant milk powder) from the shelves. 

Nevertheless, it is still too early to quantify the impact and thus our forecast remains unchanged.

Outlook    Outlook remains cautious as we believe the high raw material prices will likely affect the margin as skimmed milk prices have reached an all-time high at 3155 Euro/kg (YTD +20%, YoY +34%). 

It could get more challenging as milk suppliers no longer accept contracts longer more than 6 months, meaning that dairy companies are forced to absorb the fluctuation in milk prices. 

Forecast    We maintained our earnings estimates for now.

Rating    MAINTAIN UNDERPERFORM

Valuation     Our TP remains unchanged at RM47.00 based on FY14E PER of 22.1x.

Risks    The global economic uncertainty may curb consumers spending.

Source: Kenanga