Kenanga Research lifted the target price (TP) of Dutch Lady Milk Industries Bhd (Dutch Lady) and raised its FY24F net profit forecast to reflect higher margins on lower dairy input cost and enhanced operational efficiency.
In its Results Note today (Feb 21), the research house said its FY24F net profit forecast was raised by 3% to reflect higher margins, introduced its FY25 numbers and maintained its OUTPERFORM call.
“Correspondingly, we lifted our target price by 3% to RM26.90 from RM26, based on unchanged average industry forward price-earnings ratio (PER) of 22 times.
“There is no adjustment to our TP based on environmental, social, and corporate governance (ESG) given a 3-star rating as appraised by us,” it said.
Dutch Lady’s financial year ended Dec 31, 2023 (FY23) results beat Kenanga’s forecast but missed market expectations.
“Its FY23 core net profit of RM72 million, a decline by 8% year-on-year (YoY) beat our forecast by 8% but missed market expectation by 13%.
“The key variance against our forecast came largely from lower-than-expected dairy input cost. The total dividend per share for FY23 remained steady at 50 sen, unchanged from FY22.”
YoY, the cow milk and dairy products manufacturer’s FY23 revenue advanced 8%, driven by 3% growth in volume, attributable to an increased market share in its dairy products and strategic price adjustments aimed at maintaining a balance between affordability and profitability.
“Its FY23 gross profit surged 21% YoY thanks to stabilising dairy input cost and enhanced operational efficiency. However, its core net profit fell by 8% due to a higher taxation rate,” it said.
Kenanga said amidst generally weak spending sentiment, it favours consumer staples players over consumer discretionary players given the inelasticity of staple food demand.
“In addition, their target customers in the low-income group will also be shielded from the brunt of subsidy rationalisation and could potentially benefit from the introduction of progressive wage model,” it said.
The research house continues to like Dutch Lady for its resilient top line driven by the steady demand for staple food products, even amid the global economic uncertainties.
“Besides that, its ability to offset rising costs through price adjustments, thanks to strong brand equity and its well-established brand and the escalating recognition of the nutritional advantages of its dairy product,” it added.
The risks to Kenanga’s call include volatile food commodity prices, further weakening of ringgit resulting in higher cost of imported raw materials, and down trading by consumers.
