This article first appeared in The Edge Malaysia Weekly on June 19, 2023 - June 25, 2023

SHARES of Dutch Lady Milk Industries Bhd (Dutch Lady Malaysia) tumbled to a decade low last Wednesday, prompting talk that its Netherlands-based parent company Royal FrieslandCampina NV may take the local dairy maker private. FrieslandCampina currently holds 32.61 million shares, or a 50.96% stake, in the company.

According to the CEO of a local fund management house, assuming a 30% premium to the closing price of Dutch Lady Malaysia shares as at June 14, FrieslandCampina will have to fork out about RM1 billion (about €200 million) to buy out other shareholders of Dutch Lady Malaysia.

The dairy company’s two other substantial shareholders are the Employees Provident Fund (EPF), which owns an 11.1% stake; and Amanah Saham Bumiputera — controlled by Permodalan Nasional Bhd (PNB) — with a 7.3% stake.

With global dairy raw material prices at an all-time high amid inflationary pressure and supply chain challenges, Dutch Lady Malaysia saw its net profit decline by 81% to RM46.3 million in the financial year ended Dec 31, 2022 (FY2022) from RM248 million in the previous year. This was despite an 18% year-on-year increase in revenue to RM1.34 billion over that period.

Dragged by a poor earnings performance, falling dividend payments and weak market sentiment, the company had seen its share price fall 19% year to date to settle at its lowest level in 10 years of RM24.52 last Wednesday, giving it a market capitalisation of RM1.57 billion. The stock price is down 26% in the last 12 months.

Coincidentally, Dutch Lady’s dividend payments of 50 sen per share in FY2021 and FY2022 were also its 10-year low.  The group paid a total dividend of RM32 million each for these two financial years, lower than the RM51.2 million in FY2020, RM64 million in FY2019 and RM128 million in FY2018.

Its book value per share for the first quarter that ended in March 2023 was RM6.33.

Based on the company’s market capitalisation as at June 14, its market value has dropped by more than RM2.9 billion from its May 21, 2018, peak of RM4.48 billion — when its shares hit a record high of RM70 apiece.

Some market watchers believe the time seems ripe now for FrieslandCampina to take the 60-year-old dairy company private. Dutch Lady Malaysia went public in 1968, back when it was known as Dutch Baby Milk Industries (Malaya) Bhd.

When contacted, Dutch Lady Malaysia managing director Ramjeet Kaur Virik did not confirm or deny the possibility of privatisation.

“Share price is determined by market forces and not within our control. Dutch Lady Malaysia transparently shares details on our financial performance and any other material issues with our shareholders in accordance with requirements. We will continue to invest in sustainable future growth and remain committed to long-term value creation for all our stakeholders,” she tells The Edge in an email reply.

FrieslandCampina declined to comment, leaving Dutch Lady Malaysia to handle our questions.

FrieslandCampina — headquartered in Amersfoort, the Netherlands — has 9,927 member dairy farms and 15,137 member dairy farmers in its home country, Belgium and Germany. These European member dairy farmers, through the cooperative, are co-owners of FrieslandCampina, which has branch offices in over 30 countries and employs more than 21,700 people.

FrieslandCampina, whose products find their way to more than 100 countries worldwide, generated a profit of €292 million on revenue of €14.1 billion in 2022.

Considering the financial strength of FrieslandCampina and the poor stock performance of Dutch Lady Malaysia, market observers and industry experts whom The Edge spoke to believe the possibility of privatisation should not be discounted.

The CEO of the local fund house points out that with a cash reserve of €404 million and credit facility of €1.25 billion available as at end-2022, FrieslandCampina is financially capable of funding a possible takeover through internal funds.

In April 2022, S&P Global Ratings had reaffirmed FrieslandCampina’s credit rating at BBB (investment grade) with a stable outlook, indicating its ability to raise funds if necessary.

“The rationale behind the potential privatisation of Dutch Lady Malaysia aligns with FrieslandCampina’s vision of capitalising on growing demand for consumer dairy products in emerging markets,” says the CEO of the local fund house.

“Malaysia holds strategic importance for FrieslandCampina, not only as the shared services centre for Asia, but also as a location where the company is investing in a new factory, despite closing or selling production facilities in Thailand and China. Privatising the Malaysian subsidiary while it is trading at a 10-year low could expedite the consolidation of FrieslandCampina’s interests in this market.”

FrieslandCampina had previously engaged in similar deals in the global dairy sector, such as acquiring Philippine dairy company Alaska Milk Corp in 2012 and establishing FrieslandCampina Engro Pakistan Ltd in 2016.

A partner and executive director at a local private equity firm concurs.

“I think definitely there is a privatisation angle, given that Dutch Lady Malaysia still has a fairly solid market share in the country, not to mention that it is a very strong and mature household brand with substantial distribution points nationwide.

“And if we take into consideration its net cash position and its depressed share price performance over the past five years, I think a privatisation makes sense,” he says.

As at March 31, 2023, Dutch Lady Malaysia’s cash and bank balances stood at RM123.73 million. It has no borrowings.

An investment director with an offshore fund points out, however, that Dutch Lady Malaysia’s stock valuation is relatively higher than that of its regional peers. This means the company is enjoying a rather huge market premium just by listing on Bursa Malaysia versus other stock exchanges.

Bloomberg data shows that Dutch Lady Malaysia is trading at a historical price-earnings ratio (PER) of 46 times. In comparison, Nestlé (Malaysia) Bhd and Farm Fresh Bhd are trading at slightly higher PERs of about 50 times, while Fraser & Neave Holdings Bhd (F&N) and Able Global Bhd are trading at much lower PERs of 19 and 11 times respectively (see table).

The investment director also observes that milk is a “very sensitive commodity” subject to government policies.

“Dutch Lady Malaysia will be in a difficult position to privatise without the approval of other shareholders like the EPF and PNB. I think it won’t work unless Dutch Lady Malaysia has already secured their blessing,” he adds.

Another consideration is political sentiment, as in whether or not the rakyat will accept its privatisation.

“If we see an increase in milk prices post-privatisation, the exercise will be frowned upon by politicians, especially at this point in time,” the investment director theorises. “I personally don’t see much merit in taking Dutch Lady Malaysia private, unless it has some significant restructuring plans or needs privacy in decision-making to face increasing peer pressure from the likes of Farm Fresh.”

Dutch Lady Malaysia — then known as Pacific Milk Industries Bhd — was established in 1963 when the company built its sweetened condensed milk plant in Petaling Jaya, Selangor. 

Over the past six decades, Dutch Lady has become a prominent household brand among Malaysian consumers for its dairy products.

According to Nielsen Retail Audit, Dutch Lady Malaysia commanded a local market share of 40.2% in the liquid milk segment last year, and also held a market share of 18.1% in the formula and toddler nutrition segment.

Notably, Dutch Lady Malaysia had in 2021 sold its existing manufacturing land and buildings in Section 13, PJ, for RM200 million cash to property developer UEM Sunrise Bhd.

The dairy giant subsequently leased back the same properties for its operations for an estimated period of 27 months, to coincide with the completion of its new facility in Bandar Baru Enstek, Negeri Sembilan, by the fourth quarter of this year. The one-off land sale gain of RM154.7 million had lifted Dutch Lady’s earnings in FY2021 to RM248 million.

Commenting on prospects, Dutch Lady Malaysia’s Ramjeet concedes that the market remains volatile and is subject to various domestic and global uncertainties, foreign exchange rate fluctuations and potential regulatory changes.

“Global dairy prices are historically still at very high levels, but expected to soften in the course of 2023 as global supply exceeds demand,” she says.

Ramjeet adds that Dutch Lady Malaysia is focused on its purpose of “Nourishing Our Nation” and to achieve this purpose, healthy gross margins are essential for it to continue investing in its brands and people.

“We believe there is still room for growth. Our brand has a high household penetration — 3.7 million Malaysian households (57.7%) consume Dutch Lady products annually.”

Additionally, Dutch Lady Malaysia is in a year of transition as the group prepares to shift operations from its current factory in PJ to the new state-of-the-art manufacturing facility in Bandar Baru Enstek.

“We are investing RM540 million for our future manufacturing activities. This is a stamp of commitment from Dutch Lady Malaysia to continue ‘Nourishing Our Nation’ with trusted, sustainable and halal dairy nutrition,” says Ramjeet. 

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