Period  2Q13/1H13

Actual vs. Expectations  The 1H13 net profit (“NP”) of RM63.6m came in within consensus and our estimates, at 49.9% and 50.3% of full-year estimates of RM127.5m and RM126.4m, respectively.

Dividends  As expected, no dividend was declared for the quarter.

Key Result Highlights  YoY, the 1H13 revenue improved by 14.8% driven mainly by strong sales registered by its main powder and liquid milk products such as Dutch Lady Growing Up Milk 123 and UHT products while also partly buoyed by new product introductions in 3Q12, i.e. chocolate drink in powder format and a new mid-premium growing up milk powder, Dutch Lady ActivGold. NP rose by 15.3% YoY in tandem with the higher sales figures mentioned above and a favourable product sales mix.

 Despite the hike in skimmed milk powder (+18.5% YoY), there was still a 1.4ppt GP margin expansion in 1H13. We believe this could be due to the fact that the price increase was implemented in June. We understand that DLADY has increased the prices of its UHT (250ml) products by about 3%.

 On QoQ basis, the 2Q13 revenue and NP increased by 21.1% and 19.1%, respectively, due to the robust sales growth in powder and liquid products as mentioned above.

Outlook  Outlook remains cautious as we believe that: (i) high raw material prices will likely affect the margin as skimmed milk prices have reached an alltime high of 3,275 Euro/kg (YoY +24%) and; (ii) the recent weakening of MYR/USD would claw into their earnings as its raw materials are paid in USD.

 However, we postulate that the company is able to mitigate these impacts, in view of its strong branding, market position and the recent price adjustment of its products.

Change to Forecasts  No change in our forecasts. We are maintaining our FY13-FY14E NP estimates of RM126.4-RM136.4m respectively.

Rating   Maintain UNDERPERFORM

Valuation  We maintain our TP of RM47.00 based on an unchanged fwd. PER of 22.1x over the FY14E EPS of 213.0 sen.

Risks  The global economic uncertainty may impact consumers spending, which in turn will hit the group’s sales.

Source: Kenanga