1Q18 core NP of RM37.0m (+11%) came above our estimates, boosted by favourable commodity cost exposure. A 110.0 sen dividend was declared during the year, in-line with our assumption. We believe effective hedging methods are to be thanked for the recent expansion in gross margin, which was a prior concern following unfavourable global commodity trends. Maintain MARKET PERFORM but with a higher TP of RM66.15 (from RM61.15) as we revise for better margins

1Q18 above expectations. 1Q18 core net profit of RM37.0m is above our expectation but within consensus, making up 29% and 25% of the respective full-year estimates. The positive deviation is likely due to lower-than-expected commodity prices. A 110.0 sen dividend payment was declared in February 2018. We deem this to be within our full-year 220.0 sen expectations.

YoY, 1Q18 sales of RM266.1m grew by 6%, possibly thanks to an overall recovery in market demand. Gross profit also increased by 6%, but gross profit margin declined slightly by 0.3pts to 40.7%; we believe effective hedging mechanisms allowed the group to register substantial savings. According to data from the Global Dairy Trade, while the 6- month average for AMF during 1Q18 stood at USD6,571/mt which was c.20% higher as compared to 1Q17, the average for skimmed milk powder was lower by 25% at USD1,822/mt. Core net profit closed at RM37.0m (+11%) after adjusting for gains and losses from forex and derivatives during the quarter.

QoQ, 1Q18 sales declined slightly (-1%) when compared to 4Q17. This could be due to seasonality from the Chinese New Year festivities during the quarter, resulting in fewer business days. Thanks to better average commodity costs, gross profit margin improved by 4.9pts from 35.8%. In terms of bottom-line, net earnings registered at RM34.2m (+63%) following lower tax exposure during the quarter but only grew by 48% after accounting for core adjustments.

Is the worst over? In the previous quarters, the group was plagued by margin compressions, which raised concerns over its unfavourable exposure towards AMF prices. Recent results were viewed to be positive as consistently peaking AMF prices appeared to be undermining the soft skimmed milk powder prices. We estimated that milk raw material components consist of 50% skimmed milk powder and 50% AMF. Going forward, we are hopeful that production costs will improve, with backing from at least a stronger Ringgit if not for a correction in commodity price trends.

Post results, we boost our FY18E/FY19E earnings estimate by 13.1%/8.1% mainly in anticipation of more favourable raw material costs.

Maintain MARKET PERFORM but with a higher TP of RM66.15 (from RM61.15, previously). This is based on an unchanged 26.0x FY19E PE. The 5-year average PER valuation is in line with the larger cap F&B players, such as NESTLE and F&N, given their status as market leaders. While commanding expected 3.3%/3.7% dividend yield for FY18/FY19, DLADY appears as the most attractive in contrast to big cap F&B peers which saw excessive buying interests that have led to overstretched valuations.

Source: Kenanga Research - 26 Apr 2018