Consumer: Dutch Lady Milk Industries Bhd

Introduction

Stop looking at the babe=p From its humble beginnings in 1963, to be listed in the Stock Exchange in 1968, Dutch Lady used to be known as Dutch Baby, now grown up liau ma become Aunty. D Lady operates principally in one major business segment and is one of the most simplest corporate structure to be listed in Bursa as they have no subsidiary or associates.

D Lady manufactures and sells a wide range of quality dairy products and fruit juices for the home and export market. Their strong consumer brands names are well known to most people in Malaysia which includes Dutch Lady, Frisolac, Friso, Completa, Omela and Joy. DLady Malaysia is the market leader in key milk categories such as UHT milk, Sterilised milk and Growing-Up milk and is believed they control 19.4% share of dairy product market in this country.

Its holding company is Royal FrieslandCampina with a 50.1% stake, a Dutch multinational corporation and also one of the largest milk companies in the world. They employ close to 21,000 people with 100 productions lines and sales locations in 25 different countries and still growing. Permodalan Nasional Berhad is the 2nd largest shareholder for the company with ~20% stake.

Fundamental

1. Does the company have an identifiable durable competitive advantage?

I won't say it is totally durable, market leader with 19.4% share shows you that there is some competition with the likes of the giant Nestle & Fonterra. One thing for sure, D Lady does holds a niche when it comes to milk, Starbucks uses D Lady full cream milk if you observe carefully. Even the condensed milk segment, they are 3rd with 14% share competing stiffly against the best selling F&N Carnation.

2. Do you understand how the product works?

Dairy products are needed by people of all ages; growing children, family and young adults. Enriching source of nutrition and calcium for strong bones. A product that is constantly needed everyday.

3. What is the chance that it will become obsolete (KO) in the next twenty years?

It will happen when all cows suddenly die from Mad Cow Disease or comes 2012?.

4. Does the company allocate capital exclusively in the realm of its expertise?

Yup because it operates in one major business segment which is dairy products. In 2009, they launched Nutribus to reach out to as many people as they can to understand their needs. It has been very promising with over 500 visitors a day per location. D Lady's 70% target audiences are of family with children. Dairy nutrition awareness in the rural areas remain lagging and this is where they want to reach. You need to go to Kampung to see the bus lor.

5. What is the company's financial history and status?

• Net Profit Margin is on the rising trend over the past 10 years with the exception of 2008 due to dramatic increase in raw materials prices, a year where almost every commodity is overpriced.
• Return of Equity which means how much shareholders get in return of investment has also improved dramatically over the last 5 years, noticeable via educative marketing, repackaging and launching of new products since then onwards.
• Revenue Growth Rate has their ups and downs owing to shaky market conditions such as material costs. Nevertheless the growth rate performance over 10 years is 8.55% and last 5 years is 10.74% shows again improvements are being made. Dip in 2009 owing to lower consumer spending sentiments.

• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years. You can see that the company does not tend to overpay their dividends. Management is very conservative and at that same time being generous by rewarding faithful shareholders year after year.

6. Is the company conservatively financed?
Balance sheet is pretty decent: ~RM41mil in cash (2009) and no debts.

7. Is the company actively buying back its shares?
No, they reward shareholders via dividend payouts. They did a one time bonus issue of 3 for 1 in early 2002. Since then the number of share has remained at 64,000,000.

8. Is the company free to raise prices with inflation?
Yes, it has recently done that to increase their profit margin by passing on the part of the higher cost to its consumers in the year 2008.

9. Are large capital expenditures required to update plant and equipment?

D Lady projects that they need more capacity expansion and factory upgrades. They have committed to invest RM100mil to RM120mil over 2009-2011 period at their current site in Petaling Jaya. This will increase capacity by a hefty 50%! I see this as an one off expense and not always a reoccurring large capital expenditure. 

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that D Lady's revenue growth rate is at 10% averagely, with 91% operating cost margin, 25% corporate tax, no re-investment but a growing working capital in tandem with revenue growth at 10% for the next 5 years. Having computed all these in my opinion it is fair to buy..

D Lady at RM9.22 to RM10.24 for ~15-13% discount rate. Of course with some risk la, the higher price you pay, less returns you get but with more risk.

Observe the magic NOW. D Lady has grown from RM2.50 in 2000 to RM 12.00 in 2010. That's a whooping 17% returns per annum! Again fundamental shows you why it can perform so well and is reflected in the stock price. People might argue D Lady is a boring stock I totally agree, it is not traded a lot & often by investors everyday. BUT hot stocks are usually the one that go up so fast you can't catch the train and go down so fast you can't breathe until it is too late. A BORING stock does not MEAN it cannot do well!!

A boring share price can go up because they company is growing the shareholder equity via retained earnings. A hot share price goes up because impatient greedy people keep pumping in money which is their money to grow the equity. Think about that. Do you want your share to keep growing because people pump it? That's not sustainable.

What Do I Think? 

I like D Lady because it is simple. They are going all-out to increase dairy consumption in Malaysia by creating more awareness of the goodness of milk as a strategy to boost sales. Asians particularly still have very low consumption per capita. Ask yourself, do you drink milk a lot after 10 years old? The dairy market in Malaysia can still grow but the extend would be down to consumers' health awareness, increasing income (NEM!) and western influences on Asian diet like yogurt and skimmed milk. Also the trend now is into health and wellness, proven by the ever growing industry and expected to reach the trillions in the next decade.

In nutshell, D Lady is a good stock to own. Remember buying must happen at the right place. The bull run now has saturated and losing steam. Buying now would mean buying at peak prices. Taking a little risk buying now is IMO still OK if you dare to take the risk with the discipline that you hold it long term >5years and not to sell when panic comes. You will profit! 

Some will ask: DLady so expensive how to buy?

DLady

RM1200/RM12 = 100 units (1 lot)
with 15% returns = RM13.8x100 = RM1380

Stock A

RM1200/RM1 = 1200 units (12 lots)
with 15% returns = RM1.15x1200=RM1380

Tell me the difference? Throw away the price mentality. Lesser units doesn't mean lesser returns. Now it is time for me to drink milk and go to zzzzz.....