Getting Malaysians to drink more milk and making the habit "sexy" will be key to sustaining Dutch Lady Milk Industries Bhd's earnings and share price. The shareholders of Dutch Lady should be a happy lot as the stock has almost doubled to about RM40 this year alone as in vestors seek shelter from market uncertainty in defensive counters.
But at this price, which translates into a market capitalisation of RM2.75 billion or about 25 times last year's earnings, investors must be wondering if there is any upside potential in the counter. While Dutch Lady has been generous with its dividends in the last few years,the rise in its share price has led to a compression of yields to about 2%. "How do you make milk sexy?
Our earnings are based on successfully bringing innovation and creating excitement in the dairy market and getting consumers to drink more milk. A focus on this will drive earnings," says its managing director Rahul Colaco. Malaysians consume an average of two serv ings of milk a week compared with the recom mended two to three servings a day.
According to Rahul, there is a lack of knowledge of the good ness of milk in Malaysia and it is Dutch Lady's aim to change this. Milk itself does not have a clear cultural sig nificance to Malaysians. "This is something we need to develop," Ra hul says. Of course, this has to go hand in hand with a focus on managing the volatility in raw material prices without passing on additional costs to customers, he adds. "The future is unpredictable; past performance is no guarantee of the future. But what I can say is that our portfolio has improved with a focus on key segments in growingup, liquid and powdered milk as well as yoghurt. And we will continue to drive that," says Rahul.
In the last 18 months, a few key decisions were made at Dutch Lady that have strengthened its position in the local dairy market. For one, the company dropped some of its product offerings, in cluding exiting the creamer or condensed sweet ened milk market due to low profit margins.This freed up cash to be invested in priority products in Dutch Lady's portfolio. The company also upgraded some of its existing products, for example, innovating and relaunching its range of growingup milk while creating a buzz with various campaigns and ac tivities that led to topline growth.
Dutch Lady was also able to mitigate the effects of soaring milk fat, solid and protein prices by leveraging its parent FrieslandCampina's glo bal buying strength. Milk accounts for up to 70% to 80% of Dutch Lady's raw material costs. "As part of a global group, we worked together to minimise volatility," says Rahul. The company also worked on cost minimi sation and optimisation. The outcome of these measures was reflected in the company's im proved revenue and earnings growth.
For financial year ended Dec 31,2011, revenue and net profit rose 16.4% and 69.2% to RM810.6 million and RM108.1 million respectively from the previous year. Dutch Lady's products can be classified as powdered and liq uid dairy products and yoghurt. Powdered milk, comprising growing up milk, milk for adults and chocolate milk, contributes up to 65% to the company's turnover.
Liquid dairy products make up 30% of sales and yoghurt 5%. Another driving force for Dutch Lady is its effort to offer healthier dairy products. "We made a com mitment in late 2010 to reduce total consumption of sugar by 40% and make at least 90% of our products without sugar or re duced sugar. We achieved that within 1V4 years," says Rahul.
The global strategy of Dutch Lady and its parent includes offering healthier products and improving their nutritional value. Dutch Lady, which has a plant in Petaling Jaya operating at optimum capacity, is looking at in creasing the capacity for its UHT liquid milk in the early part of 2013.The additional highspeed lines will cost RM15 million.
Given Dutch Lady's impressive share price performance, its second largest shareholder Skim Amanah Saham Bumiputera has been taking profit, selling its shares in the company since April and lowering its stake from 22.41% to 21.88%. Its stake is still high, but the profit taking maybe an indication that the upside for the stock may be capped for now. Kenanga Research, which covers Dutch Lady, downgraded the stock from "outperform" to "market perform" in June. It has a target price of RM44.60 for the counter. "While we reckon that the stock has upside potential,given its room to compress its dividend yield into a fiveyear low of 0.4%,or at least being on a par with its peers, we continue to maintain our 'market perform' call on Dutch Lady.This is because the stock is fairly illiquid and only offers a total return of 11%," says the research house in a Aug 29 report.
In Dutch Lady's 2011 annual report, chairman Datuk Zainal Abidin Putih says special interim dividends are not guaranteed and depend on the company's performance. In 2011, shareholders received a gross dividend of 80 sen compared with 95 sen in 2010.
According to Rahul, Dutch Lady has no fixed dividend policy,but in normal circumstances, it declares two single tier interim dividends of 50 sen each a year. In February, it declared a special interim dividend of 80 sen in addition to an in terim dividend of 50 sen.
"Special because what we do is look at our cash requirements and if we don't need the surplus cash that we generate either for in vestment or growing our market position, we can choose to declare that as dividends," he explains. Rahul echos the chairman's point that dividends are not guaranteed and that it may be hard to see a repeat of the high payouts of the past. But he points out that structurally, Dutch Lady has an improved portfolio of products and the group now has a healthy profitable business with an enviable profit margin and a leading position in the dairy.
This article appeared in The Edge Financial Daily, October 1, 2012.
