This article first appeared in The Edge Financial Daily, on February 2, 2016.

Dutch Lady Milk Industries Bhd
(Jan 29, RM47.78)
Maintain outperform with an unchanged target price of RM58.50: Management is expecting a challenging financial year ending Dec 31, 2016 (FY16) in view of the weak consumer sentiment. 

Compared to a slight decline in industry volume in 2014, the industry volume growth is estimated to be flattish in 2015. 

The growth trend in the consumer industry was similar to the revenue growth trend of Dutch Lady Milk Industries Bhd, which recorded a 0.8% decline in the nine-month FY15 revenue of RM730.8 million. 

Looking forward, management was unable to provide a guidance on the industry growth for FY16, as the uncertainty about consumer sentiments and movements of raw material prices remain as key factors to growth of the group.   

The group has relaunched the Dutch Lady Children Formula Milk since early FY15 and also repackaged its Ultra High Temperature milk to highlight the freshness of its milk, as well as mother company Friesland Campina’s 140 years of farming heritage. 

The marketing strategy is essential in building the brand as well as stimulating consumer demand with the new image of its products. 

Moving forward, management declined to reveal its marketing strategy, but we expect the group to continue to embark on aggressive advertising and promotion  marketing activities to counter weak consumer sentiments and protect its market share in the competitive market.  

Management foresees the milk powder price to be volatile, thus providing no guidance on the outlook. 

Milk powder prices declined 30% to 40% in 2015, on the back of ample supply and slowing demand. 

We think that the subdued trend of milk powder prices might be sustained before any strong signal of a recovery in global demand emerges. 

Thus, the favourable improved margin led by raw material prices, is likely to be sustainable, which will be the earnings driver for Dutch Lady moving forward. As such, we make no changes to our earnings forecasts.  

We think that the valuation is justified by its strong earnings growth of 41.6% and 10.5% in the next two years, but also taking into account the risk of fluctuations in raw material prices. — Kenanga Research, Jan 29.