1H18 core earnings of RM65.6m (-4%) is deemed broadly within estimates as better tailwinds (i.e. new products, lower average costs) could translate to better quarters ahead. The group does not appear to be significantly affected by the new sales tax structure as a majority of its key products are exempted. Maintain MP and TP of RM71.20.

1H18 broadly within. 1H18 core net profit of RM65.6m is deemed broadly within our/consensus estimates, making up of 46% of both fullyear estimates. New products and lower costs could lead to higher earnings in 2H18. No dividends were declared, as expected.

YoY, 1H18 flattish sales of RM520.4m (+1%) translated to gross profits of RM201.4m (-2%) possibly due to prolonged and unfavourable exposure to high milk powder prices. Gross margin was reported at 38.7% (-1.3ppt). Nonetheless, operating margin improved by 4% thanks to lower overheads from prior investments in operational enhancements (i.e. operating software upgrades, staff cost rationalisation). Core Net Profit closed at RM65.6m (-4%) adjusting for higher taxes paid and gains from derivatives during the period.

QoQ, 2Q18 revenue of RM254.2m (-5%) was poorer due to weaker seasonality during the fasting period. Gross profits dipped by 14%, possibly due to higher commodity cost and unfavourable forex hedging. Core Net Profit was dragged down by 23% to RM28.5m following the same core adjustments above.

Chance for growth? While we had earlier anticipated for milk powder prices to be reflected more favourably in this quarter, we believe the group is in the midst of clearing prior months’ inventories which were at toppish levels. Further, a stable Ringgit environment could allow for more effective cost planning with future inventories. The coming SST implementation appears to be a non-event for the group as a majority of its core products are exempted from the tax, being deemed as necessities. We believe that coming revenue could be driven by newer and more innovative formulations in the infant market which could also boost margin returns.

Post results, we maintain our FY18E/FY19E earnings assumptions.

Maintain MARKET PERFORM and TP of RM71.20. This is based on an unchanged 30.0x FY19E PER (at +1.0SD over the 3-year mean PER, applied across large cap F&B stocks). Although approaching our ascribed value, DLADY is expected to command the best yields amongst the large cap F&B players at 3.3%/3.7% for FY18E/FY19E while its peers only offer an average of 1.4%/1.7%.

Risks to our call include: (i) weaker-than-expected sales, (ii) higherthan-expected commodity prices, and (iii) weaker-than-expected domestic currency.

Source: Kenanga Research - 29 Aug 2018