Saturday, November 19, 2011

Dutch Lady

Until today, it remains as an unsolved mystery to me – why have I not bought this stock? I can keep piling justification upon justification until my reasoning breaks down. Enough of I know, I know, I should, I should….. Procrastination is a great thief of time.

I thought my conservatism worked against me. I thought I was worried that Dutch Lady’s sales growth will eventually slow down. I thought I was worried that PE was too high, etc. Upon reviewing my own writings, I found that I was my worst enemy, I was playing double standards, etc….. why was I sitting on dead money on Parkson for example – I was hanging on to the stock while earnings did not catch up fast enough with valuation. I finally told myself, enough is enough, if the industry dynamics is long term favorable and earning has caught up with valuation, just lock down the target and shoot!

One more point, I think I want to tweak my style a bit. I want to make it like writing letters to “friends” or write the way I’ve written in my diary rather than thinking of myself as an analyst or a preacher.

When I was looking at the stock way back in 2007 ~ 2008, the stock sold for 12 to 16 times PE. The stock was selling for 20 times PE in 2009 and 2010. It was clearly expensive in 2009 and 2010 and many other stocks were cheap. I did allocate some money in many other beaten down stocks. I was churning stocks during that period with around 60-70% return but Dutch Lady probably returned close to 100%. Ouch……why was I going the hard way? Why was I climbing the coconut trees top to pluck the fruits while I can sit back and relax -- let the monkeys to do the job??

The following is the EPS/PER history


The earning jumped by 34% but the stock jumped by 135%, from 2007 to 2010. The last 2 year PE expansion has built in a lot of growth expectation. It was a no brainer to buy in 2007, still ok in 2008 but it was getting really expensive in 2009 and 2010. What about now?

The YTD EPS is RM 1.24, let's add another .36(latest Q3 ’11 result) to Q4 ‘11 and 2011 EPS will be roughly RM $ 1.6. The earning has caught up so much that the stock valuation is getting cheap again.

Given Malaysian lifestyle, I feel that the society will adopt more western style living as we get richer. Milk consumption is likely to go up in the future. Tell that your little boy/girl that he/she can get taller by drinking milk…..he/she will drink in barrels. Our per capita milk consumption is still low, the data is a bit outdated but it's the best I can find(2006). It's direction that I'm looking for.

I think the industry is not that fragmented. Since it’s a concentrated industry, the revenue will likely to go up if the overall industry is favorable. My daughter and I went around doing a bit of Sherlock Holmes’s work and we found that Nestle and Dutch Lady are pretty strong. If we buy Dutch Lay and Nestle, we are in a business to supply to almost to the whole country.

Supermarket and hypermarket operators play an important to nurture this industry. We can see Tesco, Carrefour, Jaya Jusco, Giant, the Store, etc are mushrooming. It has reached a tipping point for many Malaysia to expose to modern shopping and this will reach more and more people – beyond the city dwellers.

One of the things that worried me is the milk powder cost, it’s cyclical in nature. The cost has been going up after it bottomed out in 2009 and now is appearing to have peaked. We have been lucky that Ringgit was strong to offset some of the rising cost. However, if it goes the wrong way – weak ringgit, slow economy, rising milk powder cost – it can be negative catalysts sell off.

One of the more recent moves by new Dutch Lady’s management was to rationalize their product mix. They have been focusing on higher margin products and dropping the lower margin products. They did not give much details but I hope their higher margin products are not sensitive to economic conditions. That’s the reason why their 2011 financial results elevated to higher ground, both revenue and gross margin are expanding. I hope they can hang on, despite of a potential negative consumer sentiments ahead.

Disclosure: none

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