9M18 core profit of RM93.9m (-6%) and dividends declared are below estimates, due to weakness in sales performance. Better margins could persist with further easing of commodity prices, but this would only benefit the group meaningfully from a stable top-line. Downgrade to MP with a lower TP of RM64.10 (from RM71.20) as earnings decreased from our lower sales assumptions.

9M18 below. 9M18 core net profit of RM93.9m is below our and consensus estimates, amounting to 66% each of respective full-year estimates. Although the expansion in gross margins to c.40% was expected, declining top-line performance led to the miss in estimates. An interim dividend and special dividend of 50.0 sen and 40.0 sen were respectively declared, making up full-year payment of 200.0 sen. We deem this to be below our full-year estimates of 220.0 sen, as we do not anticipate further dividends to be paid for FY18. The lower payment could be in lieu of the lower earnings.

YoY, 9M18 sales of RM777.4m (-2%) was lower, possibly owing to more aggressive promotional pricing. However, gross profit margin improvement to 40.1% (+1.8ppt) was likely attributed by low-base milk powder prices, which translated to better gross and operating profits of RM312.0m (+2%) and RM134.1m (+5%), respectively. However, core net earnings declined by 6% to RM93.9m (-6%) from higher taxes and adjustment for derivative gains during the period.

QoQ, 3Q18 revenue grew by 1% to RM257.1m with the recovery in demand from a slower fasting period. Gross profit expanded by 19% as more favourable commodity rates kick in. Core net profit for 3Q18 also increased similarly by 21% to RM31.2m following the same core adjustments above.

In need of the top to support the bottom. The easing in input costs did not come in as a surprise with the normalising of anhydrous milk fat (AMF) prices and stable skim milk powder prices. We believe there is further room for expansion as these commodity prices continue to trend more favourably, particular for AMF. To recap, AMF prices rose from a 3-year low of USD3.0k/mt to USD6.9k/mt in late-2017 following a rise in demand for its nutrient-rich applications. As of 20 November 2018, AMF prices registered at USD4.6k/mt possibly with the stabilising of global demand (Source: Global Dairy Trade). However, a solid top-line is required for the group to reap the benefits of the better cost environment. We gathered that the group is looking to gain market share by introducing affordable prices, hence a much higher volume sales would be needed to achieve meaningful growth expansion.

Post results, we cut our FY18E/FY19E earnings assumptions by 13.1%/10.0% mainly from lower sales growth assumptions.

Downgrade to MARKET PERFORM (from OUTPERFORM) with a lower TP of RM64.10 (from RM71.20, previously). Our TP is based on an unchanged 30.0x FY19E PER (at +1.0SD over the 3-year mean PER) on a lower FY19E EPS. While capital upside may be limited from here, DLADY is expected to command the best yield amongst large cap F&B players at c.3.5% while its peers offer an average of 1.5%.

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

Source: Kenanga Research - 28 Nov 2018