Period

1Q15

Actual vs. Expectations

1Q15 net profit of RM17.0m (-26.4%) was below our expectation by matching a mere 14.2% of our full-year forecast. Consensus is not available as the stock is not widely tracked. The negative variation can be attributed to the lower-than-expected sales volume due to product relaunch as well as higher-than-expected related marketing expenses.

Dividends

None, as expected.

Key Results Highlights

YoY, 1Q15 revenue recorded a dip of 13.5% to RM196.9m which the Group attributed to the planned phasing in of the new re-launch of Dutch Lady Children Formula Milk, which resulted in the rundown of sales prior to the re-launch. Net profit declined by 26.2% to RM17.0m on the back of higher marketing expense arising from the re-launching activities which inflated the selling and distribution expenses by 19.8%.

QoQ, the revenue was lower by 25.4% again due to the product re-launch while the traditionally stronger 4Q14 was also boosted by successful marketing campaigns, which stimulated the sales of UHT milk and growing up milk. As a result, net profit was lower in comparison by 49.8% at RM17.0m.

Outlook

Although the sales might normalize in subsequent quarters, we are still disappointed with the results as net profit was the lowest since 4Q10. We believe the overall local dairy industry might be shrinking particularly the dairy-based beverages on the back of weak consumer sentiments. The volume decline could also be triggered by the demand switch to other beverages due to the higher pricing of dairy based beverages.

Meanwhile, profitability will also be affected by the volatility in milk powder prices and USD exchange rate. To recap, milk powder prices spiked up in early FY15, probably triggered by a forecast downgrade by Fonterra for its milk collections. However, the prices have normalized subsequently which we believe is led by the market forces in view of the slow demand from China and adequate supply by the exporting countries.

In a nutshell, we remained cautious on the outlook of the company due to pressures from lower sales volume and volatility in raw material prices and foreign exchange rates.

Change to Forecasts

We downgraded our earnings forecast by assuming lower sales volume while also imputing higher marketing expenses as we expect more marketing activities to be embarked in view of the volume shrinkage in the industry. As a result, FY15E-FY16E net profits were slashed by 13.3%-13.7%.

Rating

Maintain UNDERPERFORM

Valuation

Our Target Price is downgraded to RM42.16 (from RM43.52), based on 23.7x PER after we roll our valuation to FY16 from FY15. The valuation implied unchanged 3- year mean PER.

Risks to Our Call

Lower-than-expected raw material prices

Lower-than-expected industry shrinkage.

Source: Kenanga Research - 27 May 2015