Thursday 28 Mar 2024
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KUALA LUMPUR (April 26): Dutch Lady Milk Industries Bhd's share price headed south this morning — down as much as 0.31% — after the company reported a decline in its net profit for the first quarter ended March 31, 2019 (1QFY19).

Yesterday, Dutch Lady said its 1QFY19 net profit fell 0.96% to RM33.9 million on lower revenue and amid higher advertising and promotional expenses. Its revenue posted a negative growth year-on-year (y-o-y) to RM264.99 million from RM266.11 million.

At 10.18am, the stock was down 0.12% or 8 sen at RM64 with 4,000 shares traded.

Kenanga Research wrote in a note today that Dutch Lady's 1QFY19 core net profit of RM34.3 million was below the research house's and consensus expectations due to lower-than-expected sales and margins recovery.

Dutch Lady's FY19 core net profit at RM34.3 million accounted for 22% of both Kenanga Research's and consensus forecast for FY19, said the research house, adding that Kenanga Research maintained its earnings forecast for Dutch Lady now pending updates from an upcoming meeting with the company's management.

However, the research house sees there could be the possibility of downside bias adjustments to Dutch Lady's top line assumptions.

"Note that if we cut earnings by 5% to reflect the weakness in sales growth, our call has downside risks," it added.

Other risks included weaker-than-expected sales, higher-than-expected commodity prices and weaker-than-expected domestic currency, Kenanga Research noted.

Meanwhile, the research house said Dutch Lady's strategy to reduce average selling prices (ASP) in exchange for volume growth is to pursue greater market share.

It noted, however, this strategy was proven challenging in the past with consumer sentiment registering at below optimistic level, according to a local state-backed think tank.

It added the strategy may pressure its top-line, but lower milk price averages is a positive catalyst for keeping Dutch Lady's profitability afloat.

Kenanga Research has maintained "outperform" calls with an unchanged target price of RM68.30 for Dutch Lady.

"In the large-cap F&B (food and beverages) space, we value Dutch Lady at a premium against our ascribed 30.0x Fwd. PER on Fraser & Neave Holdings Bhd (F&N), given Dutch Lady's better dividend yields (3.4-3.6%, vs. 2.1-2.3%) while also offering the highest ROE (return on equity) of circa 130% amongst its peers.

"However, the low liquidity of stock may deter investors. The lack of management guidance could also cloud appetite for the stock, which we hope may improve following an upcoming meeting," the research house said.

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