9M16 net profit of RM111.3m was within expectation (71%). FY16 DPS of RM2.20 (vs FY15:RM2.20) was slightly below expectation due to the lower-than-expected payout ratio. No changes made to our earnings forecasts. Milk powder prices have continued to rise, in line with the recovery in global commodity market and thus we are turning more cautious on the outlook. TP trimmed to RM58.42 on more conservative valuation but maintain Market Perform.

Result within expectation. 9M16 net profit of RM111.3m (-3.9% YoY) is within our expectation by accounting for 71% of our full-year forecast. Consensus comparison is unavailable as the stock is not widely tracked. As expected, DPS of RM1.10 was declared, lifting FY16 DPS to RM2.20 (FY15: RM2.20) which is slightly below our expectation (RM2.40) due to the lower payout ratio.

YoY, 9M16 revenue grew 6.2% to RM776.1m partially driven by introduction of new products in 3Q16. 9M16 gross profit grew 8.9% to RM334.2m as gross margin expanded by 1.1 ppt on the back of relatively more favorable raw material price. However, 9M16 net profit fell 3.9% to RM111.3m, dragged down by higher distribution expenses (+11.1%) and other operating expenses (+38.9%) arising from brand- building investment and system upgrade.

QoQ, 3Q16 revenue jumped 13.3% to RM279.6m thanks to the launch of the newly improved formula for Friso powdered milk for children and the introduction of the RTD (Ready to Drink) UHT 125 ml milk with new Disney Marvel and Frozen character packaging. 2Q16 gross profit grew by 11.0% to RM118.7m as gross margin narrowed by 0.9ppt which we think is attributable to higher raw material costs. As a result, 3Q16 net profit grew 10.8% to RM40.7m.

Turning more cautious. Looking forward, we think that the sustainability of earnings growth still hinges on the price movement of milk powder. Milk powder prices have continued to rise with skimmed milk powder with whole milk powder prices soaring 35.6% and 54.9% YTD respectively, which is in line with the recovery in global commodity prices. Thus, we are turning more cautious on the prospect of the company. However, we believe DLADY might still be able to protect its earnings by toning down its brand-building investment if the raw material cost overly inflates.

Forecast maintained. No changes made to our FY16E-FY17E earnings.

Maintain MARKET PERFORM with lower Target Price of RM58.42 (from RM62.36). In view of the more challenging outlook, we trimmed our TP down to RM58.42 by pegging a lower PER of 22.3x to FY17E EPS. The more conservative valuation implied 3-year mean PER as opposed to +0.5 SD over 3-year mean previously.

Source: Kenanga Research - 30 Nov 2016