Fundamental Analysis of Dutch Lady Milk Industries Bhd by L. C. Chong https://lcchong.wordpress.com/ https://www.facebook.com/groups/285121298359919/

1. DLADY
FUNDAMENTAL ANALYSIS
Financial Year 2015 (31 Dec 2015)
11 March 2016
L. C. Chong (http://lcchong.wordpress.com and https://goo.gl/jjkq4P)

2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted as a suggestion to buy or sell securities.
Stock analysis in this presentation may not neutral because I have incorporated my
risk appetite and principles in the analysis.
All figures in MYR and in '000s, except per share data
2

3. DECLARATION OF INTEREST
• At the time of writing, my family members owned shares of DLADY.

4. SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unless there is a need, this analysis will not include financial figures reported in Q1,
Q2 and Q3
• I will provide QR result highlights in my blog
• Valuation is not covered in this analysis
• I will provide valuation in my blog.

5. CHANGES
• 11 Mar 2016 – FY15 Q4
• 17 Nov 2015 – First write up of DLADY in PowerPoint format

6. BUSINESS PROFILE

7. BUSINESS PROFILE
• The Company manufactures and distributes a wide range of dairy products, such as
specialised powders for infant and growing children, liquid milk in different
packaging formats and yoghurts
• The Company markets these products under various brand names such as Dutch
Lady, Dutch Baby, Frisolac, Friso and Dutch Lady Purefarm.
Powdered
dairy product
Liquid dairy
product
Yoghurt

8. BUSINESS PROFILE (CONT.)

9. OWNERSHIP SUMMARY
CORPORATIONS (PRIVATE)
53%
INSTITUTIONS
24%
PUBLIC AND OTHER
21%
INDIVIDUALS/INSIDERS
2%
Position Date: 5 Feb 2016

10. TOP 5 SHAREHOLDERS
Holder Common Stock Held
% of Total Shares
Outstanding
ZUIVELCOOPERATIE FRIESLANDCAMPINA U.A. 32,614,800 51.0%
PERMODALAN NASIONAL BERHAD 11,000,000 17.2%
AMANAH RAYA INVESTMENT MANAGEMENT SDN BHD 1,502,900 2.3%
EMPLOYEES PROVIDENT FUND OF MALAYSIA 1,308,800 2.0%
AUN HUAT & BROTHERS SDN BHD 842,100 1.3%
Position Date: 5 Feb 2016

11. OWNERSHIP ANALYSIS
• DLADY mainly owned by Zuivelcooperatie FrieslandCampina U.A. which is based in
Amersfoort, the Netherlands
• Permodalan Nasional Berhad and other fund houses owned 17% of DLADY shares.

12. ECONOMIC MOATS

13. ECONOMIC MOATS
• Cost Advantage (Wide)
• The dairy business has always been a volume game as the high capital expenditure
and recurrent brand-building expenditures have to be spread across large amounts of
output in order to gain lower unit costs
• However, in the past 10 years, DLADY was still able to enjoy more than 30% gross
profit margin.
• Switching Costs (Narrow)
• Parents have many selection of brands of milk powder, but parents seldom change
brand of milk powder once selected

14. ECONOMIC MOATS (CONT.)
• Network Effect (Wide)
• While the world’s average milk consumption (excluding butter) is about 100 litres per
person per annum, the Malaysia’s milk consumption per capita is approximately 40
litres per annum
• This indicates that there is still room for dairy products to grow in the domestic
market
• Apart from responding to the annual World Milk Day by organising campaigns to
promote the benefits of milk-drinking, Dutch Lady’s effort to educate both the
parents and kids on the importance of healthy diets at an early age through the
introduction of the right proportion of UHT milk in tetra pack for school-goers has
worked out well

15. ECONOMIC MOATS (CONT.)
• Intangible Assets (Wide)
• Innovation – DLADY’s parent company, Royal FrieslandCampina enables all of its
subsidiaries to enjoy global procurement services
• R&D – 400 scientists at the R&D unit will help in ensuring the quality of Dutch lady’s
products and practices.
• Strong branding - Quality is hallmark of DLADY's products.
• Efficient Scale
• Not applicable

16. ECONOMIC MOATS (CONT.)
113.8%
168.6%
183.1%
138.4%
162.8%167.1%
245.1%
201.6%
98.5%
212.5%
0
20,000
40,000
60,000
80,000
100,000
120,000
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
ROIC and CROIC
Avg. Capex Avg. Invested Capital ROIC % CROIC %

17. FINANCIAL PERFORMANCE

18. PROFITABILITY
17.6%
19.1% 19.4%
15.2%
19.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
EBIT Revenue EBIT Margin %

19. PROFITABILITY (CONT.)
• From FY10 to FY13, EBIT of DLADY increased from 90,104 (FY10) to 189,990 (FY13)
• In FY14, its EBIT declined to 151,973 (-20% YoY) due to higher cost of sales
• In FY15, DLADY increased its EBIT by 27% YoY to 192,345 due to lower cost of sales
• DLADY’s EBIT margin can be rated as A.

20. LEVERAGE & COVERAGE
• No debt!

21. LIQUIDITY
5
-22
-39
-35
-51
0
20
40
60
80
100
120
140
-60
-50
-40
-30
-20
-10
0
10
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
Cash Conversion Cycle
Days In Inventory Days In Receivables Days Payable Outstanding Cash Conversion Cycle
DLADY basically used other people's money to run its business.

22. LIQUIDITY (CONT.)
161,936
184,451
160,861
90,003
184,533
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
Free Cash Flow to Firm

23. GROWTH DRIVERS

24. GROWTH DRIVERS
• 25 Aug 2014 - According to Malaysia Veterinary Services Department, Malaysia’s
milk consumption has risen at 26% CAGR over the last three years (2011- 2013),
translating into milk consumption per capita of 28 litres per person based on total
population assumption of 30 million in 2013
• 25 Aug 2014 - Collaboration with Government on PS1M
• To supply fresh milk to more than 232,489 selected school children in Kelantan and
Terengganu.

25. GROWTH DRIVERS (CONT.)
• 25 Aug 2014 - Developed Dairy Development Programme (DDP) since 2008 in
collaboration with the Department of Veterinary Services (DVS) and the Embassy of
the Kingdom of the Netherlands
• To assist local farmers in increasing their milk production with better quality through
knowledge transfer session with several Dutch farmers
• More than 200 farmers has benefited from this program thus ensuring the sustainability
of milk supply from local farmers
• 25 Aug 2014 - The management has allocated around RM18 million of capital
expenditure (capex) for FY14 to improve and upgrade the different elements of its
product quality and safety.
• Dutch Lady has allocated between RM15-RM17 million capex in FY13 on expanding the
capacity of its ultra-high temperature (UHT) segment.

26. GROWTH DRIVERS (CONT.)
• 25 Aug 2014 - While the world’s average milk consumption (excluding butter) is
about 100 litres per person per annum, the Malaysia’s milk consumption per capita
is approximately 40 litres per annum
• This indicates that there is still room for dairy products to grow in the domestic market
• Apart from responding to the annual World Milk Day by organising campaigns to
promote the benefits of milk-drinking, Dutch Lady’s effort to educate both the parents
and kids on the importance of healthy diets at an early age through the introduction of
the right proportion of UHT milk in tetra pack for school-goers has worked out well.

27. GROWTH DRIVERS (CONT.)
• 25 Aug 2014 - The effective use of fixed assets in generating revenue (i.e. above 10
times on a recent 5-year average), tight control over sales and operational costs,
and efficient waste management have been reflected in Dutch Lady’s performance
over the years
• No major capital expenditure is expected over the short term
• Over the medium to longer term, should the need to increase production capacity arise,
it will be an easy task to use internally generated funds to finance it given the group’s
ability to churn out RM100 odd mln net cash from its operating activities per annum.

28. GROWTH DRIVERS (CONT.)
• 25 Aug 2014 – With the completion of the 3-year expansion plan, the group has
now enlarged its production capacity by 50% on its existing 10-acre land situated in
Petaling Jaya
• Coupled with continuous research, more new and enhanced dairy products are expected
to be seen in the market
• Currently, Dutch Lady has a 60% market share in the local liquid milk segment and is one
of the major players in the milk powder segment
• 25 Aug 2015 - To date, Dutch Lady had launched a new range of liquid milk
products under the name of Dutch Lady PureFarm in an effort to refresh the brand
• In addition, Dutch Lady have also strengthened our ready-to-drink products.

29. GROWTH DRIVERS (CONT.)
• 29 Jan 2016 – The Group has re-launched Dutch Lady Children Formula Milk since
early FY15 and also repackaged its UHT 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 equity as well as stimulating
the consumer demand with the new image of its products.

30. ISSUES/RISKS/CHALLENGES

31. ISSUES/RISKS/CHALLENGES
• 25 Aug 2015 - Milk powder prices succumbed to multiple year-low in early-August
due to the concerns of slowing demand from China and oversupply situation
• However, the volatility persists as latest figures in mid-August show strong rebound of
7.2%-16.7% in a short period which we believe was driven by the 33% output cut by
Fonterra, the world's biggest milk supplier
• Subdued trend of milk powder prices might be sustained before any strong signal of a
recovery in global demand could emerge
• The better margins to be sustained into the coming quarters taking the slump in milk
powder prices since early-2015 into account due to the 3-6 months lagging period.

32. ISSUES/RISKS/CHALLENGES
Source: http://www.clal.it/en/?section=skim_west

33. ISSUES/RISKS/CHALLENGES
Source: http://www.clal.it/en/?section=skim_west

34. ISSUES/RISKS/CHALLENGES (CONT.)
• 6 Apr 2015 - Absorbing the GST
• The prices of GST standard-rated products under its belt had not been increased,
suggesting the extra costs have been absorbed by DLADY itself
• Gauging the extent of the extra costs was difficult as the Group refused to reveal the
breakdown between dairy based beverages and infant and growing up milk powder,
which are zero-rated
• However, with price increase of 15% in FY14, we expect the impact from the extra cost
arising from GST to be cushioned together with the advantage from the lower raw
material prices.

35. ISSUES/RISKS/CHALLENGES (CONT.)
• 6 Apr 2015 – The overall dairy industry experienced a volume decline in FY14, which
explained the flattish revenue growth
• The Group attributed the downfall to the persistent weak local consumer sentiments
throughout the year, as well as demand switch to other beverages due to the higher
pricing of dairy based beverages on the back of higher raw material prices and
unfavourable forex as 80%-85% of the milk powders are imported

36. ISSUES/RISKS/CHALLENGES (CONT.)
• The dairy industry is a fast growing industry with multiple well-known competitors
that offer various milk-specialized products
Product Categories DLADY Brand Key Competitors
Infant Formula Dutch Lady, Friso Gold Lactogen (Nestle), Nan, Dugro
(Dumex), Mamil
Milk Powder Dutch Lady Nespray, Everyday, Fernleaf
Yoghurt Dutch Lady Bliss, Marigold

37. ISSUES/RISKS/CHALLENGES (CONT.)
• Strong USD/MYR will reduce profit margin of DLADY because of import of raw
materials from other countries
• Weak sugar and CPO prices offset high prices of Cocoa

38. COCOA PRICES
2,000.00
2,200.00
2,400.00
2,600.00
2,800.00
3,000.00
3,200.00
3,400.00
3,600.00
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Cocoa Beans Prices

39. CPO PRICES
450.00
550.00
650.00
750.00
850.00
950.00
1,050.00
1,150.00
1,250.00
1,350.00
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Crude Palm Oil Prices

40. GOING FORWARD

41. SHAREHOLDER RETURN
Time Frame Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3-Y 8 Mar 2013 46 46,000 7,000 3,620 56,620 7.2%
5-Y 10 Mar
2011
16.06 16,060 10,550 33,560 60,170 30%
10-Y 10 Mar
2006
8.25 8,250 14,250 41,370 63,870 22.7%
Assumptions:
1. Commission paid is ignored in this simulation
2. The current price is 50.82 (as of 10 Mar 2016)
3. Unit purchased is 1,000.

42. SHAREHOLDER RETURN (CONT.)
0.0000
0.5000
1.0000
1.5000
2.0000
2.5000
3.0000
2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31
DPS

43. GOING FORWARD
• I am positive with DLADY’s future:
• Its solid fundamentals and strong branding position
• Aggressive marketing and promotional activities
• Robust demand of diary product in the long-term as Malaysia’s population is projected
to reach 38 million people by 2040 from 30 million currently
• Short term concerns:
• The sales volume to continue the downtrend in view of the tough and challenging
operating environment with consumer spending being undermined by the high costs of
living.