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DLADY – Fundamental Analysis FY15

Fundamental Analysis of Dutch Lady Milk Industries Bhd by L. C. Chong

https://lcchong.wordpress.com/
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DLADY – Fundamental Analysis FY15

  1. 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. 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. 3. DECLARATION OF INTEREST • At the time of writing, my family members owned shares of DLADY.
  4. 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. 5. CHANGES • 11 Mar 2016 – FY15 Q4 • 17 Nov 2015 – First write up of DLADY in PowerPoint format
  6. 6. BUSINESS PROFILE
  7. 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. 8. BUSINESS PROFILE (CONT.)
  9. 9. OWNERSHIP SUMMARY CORPORATIONS (PRIVATE) 53% INSTITUTIONS 24% PUBLIC AND OTHER 21% INDIVIDUALS/INSIDERS 2% Position Date: 5 Feb 2016
  10. 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. 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. 12. ECONOMIC MOATS
  13. 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. 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. 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. 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. 17. FINANCIAL PERFORMANCE
  18. 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. 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. 20. LEVERAGE & COVERAGE • No debt!
  21. 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. 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. 23. GROWTH DRIVERS
  24. 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. 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. 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. 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. 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. 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. 30. ISSUES/RISKS/CHALLENGES
  31. 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. 32. ISSUES/RISKS/CHALLENGES Source: http://www.clal.it/en/?section=skim_west
  33. 33. ISSUES/RISKS/CHALLENGES Source: http://www.clal.it/en/?section=skim_west
  34. 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. 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. 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. 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. 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. 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. 40. GOING FORWARD
  41. 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. 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. 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.

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