Period

4Q15/FY15

Actual vs. Expectations

FY15 net profit of RM141.0m (+28.3%) is below our expectation by matching only 90.7% of our fullyear forecast. Consensus comparison is unavailable as the stock is not widely tracked.

The negative deviation can be attributed to the higher-than-expected distribution expenses arising from advertisement and promotion (A&P) investments.

Dividends

As expected, DPS of RM1.10 was declared, which is within our expectation.

Key Results Highlights

YoY, FY15 revenue was flattish at RM1b (+0.1%) due to product re-launching in 1Q15 as well as on the back of weak consumer sentiment throughout the year. Gross profit surged 28.0% to RM420.7m thanks to a sharp decline in milk powder prices by 30.9%-40.0%. However, the Group reinvested the savings from raw material costs into A&P activities, which inflated the distribution expenses by 29.9%. As a result, net profit jumped 28.3% to RM141.0m.

QoQ, 4Q15 revenue rose 6.0% to RM270.9m, probably due to the A&P activities boosting sales. However, higher distribution expenses (+27.2%) and other operating expenses (+174.7%) during the quarter dragged down net profit by 49.5% to RM25.2m.

Outlook

We were surprised by the aggressive A&P initiative by the Group which caused the upsurge in expenses and in turn limited the earnings growth. However, the move signifies the confidence and optimism of the company in committing to investment as well as paving the way for longerterm earnings growth to be sustained.

Moving forward, the sustainability of earnings growth still hinges on the price movement of milk powder and we believe the subdued trend of milk powder prices might be sustained before any strong signal of a recovery in global demand could emerge. Thus, we expect DLADY to continue to benefit from the favourable raw material prices.

Change to Forecasts

We downgrade FY16E net profit by 7.0% after assuming higher distribution expenses into our forecast. We introduce our FY17E forecast with net profit growth of 5.3%.

Rating

Maintain OUTPERFORM

Valuation

Correspondingly, with the earnings cut, our TP is trimmed to RM56.40 (from RM58.50), based on 22.6x FY16E PER, which is an unchanged target PER of 3-year mean.

Risks to Our Call

Higher-than-expected raw material prices.

Weaker-than-expected consumer sentiment.

Source: Kenanga Research - 24 Feb 2016