Period  3Q13/9M13

Actual vs. Expectations The 9M13 net profit (NP) of RM105.9m was above expectations, making up 84% of the consensus estimate of RM127.5m and our estimate of RM126.4m. Lower-than-expected distribution cost has resulted higher profit margins hence the positive variance.

Dividends  DLady proposed a single-tier interim dividend of 50 sen and a special interim dividend of 80 sen, amounting to a total of 260 sen for the year, which made up 99% of our estimate.

Key Result Highlights QoQ, the 3Q13 revenue was up by 5.6% on the back of higher sales from growing-up milk powder and UHT products, as well as, the re-launch of Friso powder products in July. Its NP jumped by 22.3% QoQ while NP margin improved by 2.2ppt to 16%. The better margin was mainly boosted by favourable sales mix and lower distribution expenses (9.4% vs 12.1% in 3Q13 and 2Q13, respectively).

 YoY, the 3Q13 and 9M13 revenues improved 17.3% and 9.6%, respectively, due to the reasons as mentioned above. Meanwhile, we also believe the strong jump partly resulted from the increased market share after its competitors recalled their products in Aug 2013. NP also rose 31.7% and 18.2% YoY in tandem for 3Q12 and 9M12, respectively. Improvement was attributable to the higher sales above, lower distribution cost and helped by a better sales mix.

Outlook  Outlook remains cautious as we believe that: (i) high raw material prices will likely affect the margin as skimmed milk prices stay on the high-side of 3,125 Euro/kg (YoY +17%) and (ii) the anticipation of US quantitative easing may result in the weakening of MYR/USD which would claw into their earnings as its raw materials are paid in USD.

 However, we postulate that the company is able to mitigate these impacts, in view of its strong branding, market position and the recent price adjustment of its products.

Change to Forecasts We are revising our FY13E and FY14E NP estimates higher from RM126m and RM136m to RM138m and RM144m, due to better margins by lowering the distribution cost to revenue from 13.9% to 12.0%.

Rating Upgraded to MARKET PERFORM

Valuation  In tandem with the earnings adjustment, we have increased our TP from RM47.00 to RM49.70 based on an unchanged fwd. PER of 22.1x over the FY14E EPS of 224.8 sen.

Risks to Our Call Global climate uncertainty may hit the group’s earnings.

Source: Kenanga