Harimau Capital

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.

Dutch Lady Milk Industries Bhd’s historic decision to cease the production of condensed milk in late 2011 was not merely due to it being a low margin business but it was part of the group’s effort to offer a healthier portfolio of products to consumers.

“We made a commitment at end-2010, when we said we would reduce the total consumption of sugar by 40% and we would make at least 90% of our products either without added sugar or reduced sugar from the levels at that time,” said Rahul Colaco, managing director of Dutch Lady.

The dairy company achieved the goal within 18 months, ahead of the planned timeline of end-2013.
“This is a very important part of our strategy to offer healthier products and help improve the nutritional intake of Malaysians,” said Colaco.

In fact, it is part of the group’s global strategy to improve public health. In Southeast Asia, for example, the group, together with sister companies in the region, has undertaken a survey to study the nutritional profile and habits of 7,000 children. The group will use the data to work with various NGOs and government agencies to improve the nutritional habits of the children, who include Malaysians.

“It’s an important part of our corporate mission,” Colaco said.
Dutch Lady is 51% owned by Royal FrieslandCampina NV, a multinational dairy company wholly owned by a dairy cooperative which has 14,391 member dairy farms in the Netherlands, Germany and Belgium.

Colaco says the challenge is to get people to drink milk, especially in Malaysia where average milk consumption per capita is only two servings a week

Colaco said milk in itself is healthy, giving Dutch Lady a natural advantage. The challenge, however, is to get people to drink more milk, especially in Malaysia where the average milk consumption per capita is only two servings a week compared with the World Health Organisation’s recommended two or three servings a day.

Based on this statistic, the opportunity for growth for Dutch Lady is phenomenal, he said. However, to get there, Colaco said the group needs to do two things: first, understand why consumers are not drinking milk and second, communicate to them the goodness of milk.

“No other beverage naturally has as much nutrition as milk, it’s really a magical cocktail of natural ingredients that are essential for people of all ages. There’s a misconception it is only for babies, but milk has essential nutrients that are beneficial to everyone,” Colaco said.

For Dutch Lady, the task ahead will be to create public awareness of its products. The group has embarked on various campaigns to promote the goodness of milk. For example, Dutch Lady held its first Milk Elections last year as part of the World Milk Day celebration. It also ran the Dutch Lady Kid and Dutch Lady School campaigns and was involved in the government’s 1Malaysia School Milk programme.

In fact, Dutch Lady’s mission to “help Malaysia move forward in life with trusted dairy nutrition” is in sync with its corporate social responsibility programme.

“CSR is a key part of our business mission. And one of the things we are fortunate to have is a product which is inherently healthy. Educating people about the goodness of milk, I would say that in itself is a CSR activity,” said Colaco.

Dutch Lady’s CSR activity is centred on women and children. Hence, aside from its work with children via various educational programmes in schools, Dutch Lady has established a Working Mothers Foundation as a platform for working mothers to discuss the challenges of balancing work and personal life. Furthermore, from January 2011, Dutch Lady increased maternity leave from 60 days to 90 days for its staff.

Apart from activities to drive milk consumption, Colaco said Dutch Lady will continue to focus on managing the volatility of rawmaterial prices by buying at the right time, along with its parent company, while continuing value improvement and cost optimisation without passing on the cost to consumers.

The cost of milk solids has seen steep increases over the last few years, but despite this Dutch Lady has shown rising profit. For the financial year ended Dec 31, 2011 (FY11), the company achieved its highest level of profit before tax in its history at RM141 million, 57% above the year before.

The company’s share price has risen 114% year-to-date, on the back of investor interest in defensive counters at a time of market uncertainty.

Dutch Lady does not have a stated dividend policy, but has been paying out steady dividends, adding to its appeal as a defensive stock.Based on its closing price of RM49 yesterday, its 12-month yield works out to 3.67%, according to Bloomberg data. For FY11, Dutch Lady paid out 80 sen gross dividend per share compared with 95 sen in 2010.

Colaco said while Dutch Lady has no fixed dividend policy, the company typically declares a single-tier interim dividend of 50 sen twice a year. In May this year, the company declared a special interim dividend of 80 sen.

He cautioned that dividends are not guaranteed, subject to the company’s cash requirements and financial performance.

“Our objective is to create shareholder value in terms of total shareholder returns, in terms of capital appreciation and dividends,” he said.

On the company’s challenges in the next 18 months, Colaco said amid the war for talent in Asia, attracting and retaining employees will be a constant uphill task for Dutch Lady.

“There is a shortage of skilled, experienced and ambitious people and that will continue to keep many CEOs awake at night. How do you attract and retain the best talent for your team?” he said.

Volatile raw material costs will be another challenge for the dairy company given the droughts in many parts of the world. This, coupled with growing demand for dairy products, especially in China, will result in further increases in raw material prices for milk.

“We see potential for increases in prices in the coming quarters, which will be a challenge for dairy players,” Colaco said.

Dutch Lady emerged as the best performing stock in the consumer products sector in The Edge Billion Ringgit Club 2012 for delivering 60.23% in returns to shareholders over three years.

Between 2009 and 2011, its share price increased significantly from RM11.60 to RM34.26.
Dutch Lady has its origins in sweetened condensed milk when it was incorporated in 1963 as Pacific Milk Industries (Malaya) Bhd, before expanding to producing UHT milk in the 1970s. In 1968, it was listed in Malaysia and Singapore.

In the 1980s, the company was delisted from the Singapore Stock Exchange in line with the government’s efforts to promote the Kuala Lumpur Stock Exchange.

Today, Dutch Lady is a leading dairy company in Malaysia, with 20% market share and a market capitalisation of over RM3 billion on Bursa Malaysia.

This article appeared in The Edge Financial Daily, Oct 21, 2012.

PETALING JAYA: Dutch Lady Milk Industries Bhd, which is gaining market share, is on track to hit RM1 billion sales in the next financial year ending Dec 31, 2013.

“As my predecessor mentioned, it was our ambition when we defined our strategic long-term plan, to hit RM1 billion sales in three years; we started the programme in 2010.

“We are on track to fulfil that ambition in a three-year time frame. So we hope to achieve that next year. We can make it earlier if we can get more Malaysians to drink our milk,” said Dutch Lady managing director Rahul Colaco.

As at 2011, Dutch Lady had an 18.6% share of the dairy milk market, up from 18.1% in 2010. In the children’s milk segment, Dutch Lady had the second largest market share with 22% while Dumex was ahead with 23%.

In the liquid milk sector, Dutch Lady is the leader with a 50% market share with its nearest competitor being Nestle with 20%. In 2011, the dairy market grew by 8.5% but growth has since slowed to about 6% in the last four months.

“We are growing faster than the market and are gaining market share. Our mission is to gain market share,” said Colaco.
He declined to comment on whether the company is expecting another record-breaking year for its pre-tax profit.

For FY11, Dutch Lady, which will be celebrating its 50th year in Malaysia next year, posted a pre-tax profit of RM141.55 million, up 57% from RM90.1 million in 2010. Revenue was RM810.65 million and net profit RM108.08 million.

Colaco reiterated that the company’s ambition is to focus on growing the market and out-gaining its competitors in market share. It will also continue to invest in market activities to support its brands and top line growth.

On how the company can be cost effective at a time when raw material prices are volatile, Colaco said as part of the Friesland Campina group, Dutch Lady has a lot of support from the global procurement team that helps in buying raw materials at the right time and the right price.

“This helps us a lot and [we]hope it will give us some competitive advantages in having slightly better purchase prices than our competitors,” he said, adding that supply of fresh milk from Malaysia only meets 3% to 4% of the total requirement, with the bulk of the supply coming from Europe, Australia and New Zealand.

Colaco said Dutch Lady will limit its price increases to very selective items. It is likely to be less than a 2% hike compared with the 5% hike for some of its products last year.

He said the company is expanding capacity for its liquid milk production as business has grown significantly.

“In the recent past we have been having double digit growth in the liquid milk segment. We increased capacity in 2011. In the course of next year, we will have to increase our capacity in liquid milk once again,” said Colaco, adding that the process of procuring and adding new lines will begin this year.

On whether there would be any bonus issue, Dutch Lady chairman Datuk Zainal Abidin Putih said there is no need to do so presently.


This article appeared in The Edge Financial Daily, June 14, 2012.