Dutch Lady Milk Industries Bhd.

Just realised during this early June, that DLady is such a good company which suit my long-term-growth strategy. Not much research had been done before I decided to take it into my portfolio .

Bought it at RM47.20，a price equivalent to PE ~24，and net DY of 5.5%.... which i think is quite reasonable though not very attractive.


 x x x

company's financial performance review:

(click here for full view)

summary:

• Revenue CAGR stood ~ 9%p.a. for the past ten years. 
• Ten years profit CAGR at ~23%.  
• an up-trend of profit margin and ROE.
• continuous growth of dividend.

The growth of revenue had slow down a bit in past five years, but the profit growth rate still stood above 20%p.a., due to the continuous improvement on margin.

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The company had just completed its expansion plan which could boost its UHT milk capacity by 50%. There's still many sub-segment of milk products market that DLady is yet to venture into. These markets provide sustainability of its long-term growth.

I'm quite optimistic about the company's new product -- DutchLady Chocolate Drink, which had just been launched last year. I believe it had a potential to gain a significant share in the chocolate drink market.


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Besides its long-term growth potential, DLady poses some attractive criteria:

• It's the leader in its market (liquid milk and milk powder) -- had a market share higher than Nestle。
• Focus on simple product -- selling liquid milk, and other milk products.
• Focus on single market -- Malaysia and Singapore, that's all.
• High profitability -- ROE had been >30% for many years, and now up to ~50%.
• Strong cashflow -- which translated into good dividend record.
• Huge cash, zero debt.

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My expectation on DLady:

• Continue to be a Leader, and further increase its share in milk product market.
• Revenue grows at a 7~10% rate, while profit growth rate stand > 10% p.a.
• Dividend maintained at same level as 2012. (RM2.60 per share)
• (further reading: The sustainability of DLady's "high" dividend.)

Expected return on investment, ~15% p.a.
Expected period of investment, 5~10 years.


now DLady weight about 7% in my portfolio.

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The sustainability of DLady's "high" dividend.

Dutch Lady had paid a high dividend of RM2.60 per share in 2012. This is more than 3-folded as compared to 2011. The sudden jump of dividend, which is much higher than its EPS (RM1.93), had caused suspicion about its sustainability.

For this matter, I think we could get some clues from the company's history -- a giant leap of dividend occurred once in year 2004 too, and here's a summary of what happened then:

• 2004, DLady declared dividends that was 80% higher than its profit, and that dividend was more than 4-folded compared to 2003.
• 2005, the company able to increase the dividend, to a level that was 50% higher than its profit on the same year.
• 2006~2007, same level of dividend, while the company's profit catching up.
• 2008, failed to maintain the dividend rate due to sharp hike of raw material price.
• 2009, restored dividend to previous years' level, and maintain it during 2010~2011.

x x x

During years 2006~2011，the dividend of DLady didn't increase although its profit had experienced a strong growth, hence the accumulation of huge cash in the company. So in 2012, we saw the company able to paid a dividend much higher than its earnings, again.

In the coming years, I'm quite optimistic that DLady will be able to maintain its dividend at current level (RM2.60 per share), due to its potential of continuous profit growth, its strong cashflow, and the huge cash reserves.

So, for the current share price, I'm expecting a net dividend yield of >5%.


 x x x

Historical data:

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Risk Management -- reduce holdings on Power Roots.

I had just sold half of my holdings on Power Roots yesterday.

In his book Common Stocks and Uncommon Profits, Philip Fisher mention that there are on three reasons where a good stocks should be sold:

•  We had made an error in our assessment of the company.
•  The fundamental of company has deteriorated and no longer meets our requirement.
•  We found a better investment which could provide higher long term results.

The fundamentals of Power Root remain great since I invested...
In fact, it performed well much better than I expected initially.
So according to Fisher's points I had no reason of selling it now unless there's is a much better investment opportunity.

Incidentally, I just found a great company recently that meets my long-term-investment strategy, and the cash on hand is limited... So this sale of some Power Roots share just come at a right time to fund my new investment.

 x x x

However, there's a more important reason for the reduction in holdings -- to accomplish my portfolio's diversification policy.

For risk management purpose, I always want to maintain an adequate degree of diversification. So, I had set some guidelines to limit my exposure to any single companies or industry.

My portfolio contain companies of different sizes, and I had set different exposure limit for different size of companies. The reason is obvious -- smaller companies tend to have higher risk than big ones, hence should take up smaller share in a portfolio.

For companies below RM1 billion (market capital) I had set a 10% limit for their weight, while big companies like Harta and LPI could have a limit as high as 20%... At the same time, I also make sure that the weight on any single industry must not exceeded 30%. (currently my holdings on gloves, namely Harta, Supermx, Kossan had a total weight of ~28%).

Power Root is the smallest company in my portfolio (mkt cap ~670m). It weight only ~5%  when I invested in it. However, the share price climbed up so fast that the weight come to ~12% recently. This make me a bit uncomfortable, hence the reduction of holding came into place.

 x x x

After selling half of the investment, the weight of Power Roots had now become ~6% in the portfolio. I will be holding this part of shares as long as the fundamentals of the company remain strong...

In future if the share price of Power Roots boost up for another round and break my 10% mark again, I would probably just keep it then, because by that time it would be considered as a medium size company already.

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