Period

1Q16/3M16 Actual vs. Expectation

3M16 net profit of RM33.9m (+99.0%) is within our expectation by matching 21.6% of our full-year forecast. Consensus comparison is unavailable as the stock is not widely tracked.

Dividends

None as expected.

Key Results Highlights

YoY, 1Q16 revenue rose 26.9% to RM249.8m as 1Q15 was exceptionally weak due to planned phasing in of the new re-launch of Dutch Lady Children Formula Milk, which resulted in the rundown of sales prior to the re-launch. Gross profit margin expanded by 7.9ppt to 43.5% thanks to favourable milk powder costs (-30%), which pushed gross profit higher by 54.8% to RM108.6m. As a result, net profit catapulted 99.0% to RM33.9m.

QoQ, 1Q16 revenue shrank by 7.8% to RM249.8m due to seasonality as the Chinese New Year during the quarter cut numbers of selling days short. However, PBT still managed to surge 33.3% to RM45.8m due to the swing in distribution expenses recognition as well as the more favourable raw material prices (-14%) in between the quarters. Net profit grew 34.4% to RM33.9m, further aided by a slight lower effective tax rate of 26.0% (vs 4Q15: 26.6%).

Outlook

Conclusively, we think that the numbers are encouraging and positive despite an extraordinarily weak 1Q15 base as a comparison. This is considering that the gross margin has continued to expand at the expense of subdued milk powder prices trend, which translated into lower raw material costs for the Group.

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 made no changes to our earnings forecasts.

Rating

Maintain OUTPERFORM

Valuation

We roll over our valuation to FY17E, deriving our higher TP of RM59.20 (from RM56.40), based on unchanged 22.6x PER, which implied 3-year mean.

Share price appreciated 13.2% since our upgrade in Nov 15, but we see more upside potential on the stock supported by healthy earnings growth of 11.5% and 6.5% over the next 2 years.

Risks to Our Call

Higher-than-expected raw material prices.

Weaker-than-expected consumer sentiment.

Source: Kenanga Research - 26 Apr 2016