Generations in Malaysia have grown up with the products of Dutch Lady Milk Industries Berhad (“Dutch Lady”) (KLSE:DLADY).  

Since the start of the year, Dutch Lady’s share price has fallen more than 24% due to the coronavirus. In this article, we will take a closer look at the business, management and financial aspects of the company, to see if it is a worthwhile investment.  

(Source: Google Finance)

Business Overview

Dutch Lady started as a manufacturer of sweetened condensed milk in the 1960s with its factory in Petaling Jaya, Malaysia. More than 55 years have passed and the company is still operating from the same production plant. However, it has expanded its range of quality and dairy products across the past six decades. 

Dutch Lady is the top dairy company in Malaysia, with a 40% market share of the liquid milk segment. With a workforce of about 600-strong employees, the company’s ambition is to increase consumption of milk in Malaysia and uplift the health status of Malaysians. 

The company sees opportunities to grow its sales volume from a growing middle class and a rising awareness of the benefits of milk and milk-based products in Malaysia. The company continues to make product innovations to tap into market trends to further increase milk consumption. 

As an example, Dutch Lady recently shared that the company is planning to strengthen its position in the food and beverage (F&B) sector, particularly in the bakery and confectionery industry. It is doing it by offering enhanced products, such as the Dutch Lady Pure Farm Fresh Milk and Dutch Lady Ultra-High Temperature Processing (UHT) Professional Full Cream Milk. The company currently serves more than 250 cafes as well as 195 hotels and bakeries nationwide.

The company recognizes that affordability of milk is important to ensure sustainable growth. As part of its “Grass-to-Glass” initiative, the company works with relevant government agencies to increase sourcing of local milk. Over the last five years, the company has bought local fresh milk from Malaysian farmers to produce 85 million packs of milk.

While Dutch Lady is a household name in Malaysia, the company is facing increasing competition from other industry players. One of its strongest competitors, Fraser & Neave Holdings Berhad (KLSE: F&N), has announced plans to invest RM650 million to Ladang Chuping to turn it into a dairy centre. Once completed, Ladang Chuping will be capable of hosting 20,000 milking cows to produce 200 million litres of fresh milk yearly. 

Major Shareholders

(Source: 2018 annual report)

Dutch Lady’s single largest shareholder is FrieslandCampina DLMI Malaysia Holdings B.V., with an equity stake of 50.97%. This makes Dutch Lady part of the Royal FrieslandCampina Group, which is the world’s largest dairy co-operative and one of the top five dairy companies in the world. 

Interestingly, the majority of Dutch Lady’s top 10 shareholders comprise institutional funds, such as the Employees Provident Fund Board, which is the second largest shareholder with a 9.29% equity stake. This speaks volumes of the stability of the company and its generosity as a dividend payer.  

(Source: 2018 annual report)

Financials  

Measure 1: Growth in revenue and profits

While Dutch Lady has grown its revenue slowly from RM1.0 billion in 2014 to RM1.1 billion in 2019, its profits have declined from RM109.8 million in 2014 to RM103.0 million in 2019. The company blamed its poor results in recent years on its pricing strategy, higher raw material prices and a negative exchange rate impact. 

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Measure 2: Profitability

Dutch Lady’s gross profit margins have improved from 32.8% in 2014 to 37.9% in 2019. Conversely, its net profit margins have declined from 11.0% in 2014 to 9.7% in 2019.  

The company’s return on equity ratios are fantastic ranging from 69.9% – 122.7% over the past 6 years. This shows that management is efficient in allocating shareholders’ capital. 

Measure 3: Liquidity

Dutch Lady does not have any liquidity issues as the company has recorded positive current and cash ratios for the past 6 years. In fact, the company has cash and cash equivalents of RM61.5 million versus a bank overdraft of RM16.7 million as at 31 December 2019. 

Additionally, the company has recorded negative cash conversion cycles over the past 6 years. This means that it is generating sales from customers before it has to pay its suppliers. 

Round 4: Dividends payout

Dutch Lady is a consistent dividend payer. However, income investors may be concerned to note that dividend per share was reduced to RM2.00 per share in 2018 and RM1.00 per share in 2019 due to the company’s poor results in recent years. 

Conclusion

With a closing share price of RM37.60 as at 17 March 2020, Dutch Lady is trading at a price of earnings (PE) ratio of 23.37, with a market capitalisation of RM2.41 billion, and an indicative yield of 2.66%. 

While many may regard this as a blue-chip company, it is facing challenges in growing its revenue and profits meaningful as its market is limited to Malaysia. Indeed, Dutch Lady is a financially solid company but we are mindful that competition has intensified which could erode the company’s market share. 

All factors considered, the company does not look like an attractive investment for the time being, particularly since its valuation is on the high side, considering its low growth prospects. 

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