Period  1Q14

Actual vs. Expectations  Dutch Lady (DLADY)’s 1Q14 net profit of RM23m is below expectations, making up 16% of both our fullyear forecast and consensus estimates. The variance was mainly due to compressed margins from rising production costs and significantly increased skimmed milk prices in FY13.

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

 Post-earnings revision, we expect a lower total dividend of 220 sen per share (from 227.8 sen previously) which translates into a dividend yield of 4.6%.

Key Results Highlights

 QoQ, revenue declined 13% on weak market growth while net profit dropped 29% on higher operating costs (+21%).

 YoY, revenue rose 10% to RM206.3m on slightly increased selling prices in both child nutrition and ready-to-drink (RTD) beverage product groups. Net profit declined 20.5% to RM23m on higher skimmed milk costs. YoY, average skimmed milk prices increased by 20% to EUR638/metric ton (MT), compounded by a weaker ringgit. Hence, we estimate a 32% increase in average skimmed milk prices to RM2870/MT in 1Q14.

Outlook  The near-term outlook is challenging with DLADY facing increasing consumer uncertainty in a rising cost environment. However, we believe the Company can mitigate part of these impacts with its strong branding and market position.

 We do expect to see some positive sales impact in 2H14 over the holiday season and possible stocking up activities in 1Q15 leading up to the implementation of GST.

 In the long-term, we believe there remains room for growth as the population urbanizes further and nutrition awareness improves.

Change to Forecasts     We have revised downwards our FY14-FY15E net profit estimates by -4.9% and -3.8% to RM138.7m-RM146.7m, respectively, from RM145.8m-RM152.5m.

Rating Maintain MARKET PERFORM

Our latest TP of RM48.00 reflects total return of 6.1% (upside 1.5%; dividend yield 4.6%). At this level, the stock has limited downside risk due to its decent dividend yield of 4.6% (against 3-year average historical dividend yield of 4.0%). However, the stock is lacking catalysts and earnings excitement at the moment. Thus we maintain MARKET PERFORM with a total return of less than 10%.

Valuation  We revise downwards our TP on DLADY to RM48.00 (from RM50.36 previously) based on an unchanged PER of 22.1x over the revised FY14E EPS of 216.7 sen.

Risks to Our Call

 Volatile material cost (particularly skimmed milk powder) which may be caused by global climate uncertainty affecting supplies.

Source: Kenanga