Dutch Lady Milk Industries Bhd

DUTCH Lady (Fundamental: 2.3/3, Valuation: 1.5/3), one of the country’ top three dairy products manufactures, offers investors a comparatively defensive investment with higher-than-market average yields in the face of slowing economic growth and market uncertainties. Indeed, the low-beta stock has outperformed the broader market, up 5.5%, since our recommendation back in early June.

With steadily growing operating cash flows and minimal need for capital expenditures, Dutch Lady is a cash cow that keeps giving. Its shares started a bull run in 2012, when it declared a bumper dividend of RM2.60 – to return huge cash pile accumulated in prior years to shareholders.

Dutch Lady lowered dividends to RM2.20 per share in 2014, from RM2.60 in 2013, mirroring weaker earnings. Nonetheless, this still translates into a superior yield of 4.6%, compared to 3-3.2% offered by its larger peers Nestle and F&N.

Dutch Lady has paid out RM1.10 in dividends, so far this year, and should declare a final dividend by this month-end. We believe it can sustain current dividend level, at least, for the next few years given its debt-free balance sheet and net cash of RM118.8 million.

For 2Q2015, net profit doubled y-y to RM48.8 million on the back of a modest 3.8% growth in revenue, bolstered by lower milk-based commodity costs and the relaunch of Dutch Lady Children Formula Milk. For 1H2015, net profit jumped 39% y-y to RM65.8 million, or equivalent to 60% of last year’s total net profits.

Milk powder prices are seen to remain soft in the coming quarters amid global supply glut and slowing growth in China, the world’s biggest importer. Hence, we expect margins to recover in 2015 even though its top line might suffer in the near term, due to weaker domestic consumption.

The stock is trading at a trailing P/E of 23.8 times, just a shade lower than its 3-year average of 24.3 times. The premium valuation reflects the strong fundamentals of a high-quality, dividend-paying F&B stock.