FY18 core net profit of RM124.1m and full-year dividend of 200.0 sen came within our expectations. While sales may see limited momentum, the group could be poised to see some further expansion in margin on better milk powder prices. Upgrade to OUTPERFORM with a higher TP of RM67.94 (from RM64.10) as we increase valuation to 30.0x FY19E PER.

FY18 within. FY18 core net earnings of RM124.1m came within our expectation (100%) but below consensus (94%). We believe the miss by consensus was higher-than-expected sales growth. No dividends were declared, as expected. The full-year dividend payment of 200.0 sen represents a payout ratio of 103% of profit.

YoY, 12M18 sales of RM1.05b (-2%) was lower, possibly owing to more aggressive promotional pricing. On the back of better milk powder prices, gross profit improved by 4% to RM416.3m (margin: 39.7%, +2.0ppt). However, core net earnings for 12M18 of RM124.1m (-<1%) was flattish after adjusting for forex and derivative gains during the year.

QoQ, 4Q18 revenue grew by 6% to RM271.2m, likely on stronger volume growth. However, gross profit fell to RM104.2m (-6%) possibly owing to milk and packaging costs being sequentially higher. This translated to similarly weaker core net profit in 4Q18 (-3%).

Challenging top-line could still be supported by better costs. While sales trends of the group continue to appear uninspiring, we take comfort on the inelastic demand for dairy products. We believe there could still be room for the group to benefit from better average input costs, given their exposure to anhydrous milk fats (AMF). As of Feb 2019, AMF prices registered at USD5.6k/mt as compared to USD6.5k/mt in Feb 2018. This should benefit the profitability of more nutrient-rich and premium products, particularly offerings in the infant and toddler segments.

Post-results, we tweak our FY19E earnings by -1.1% as we incorporate FY18 results. At the same time, we introduce our FY20E numbers.

Upgrade to OUTPERFORM (from MARKET PERFORM) with a higher TP of RM67.94 (from RM64.10, previously). Our revised TP is based on a higher ascribed 30.0x FY19E PER (from 28.0x), as we revalue the stock at +1.0SD over its 3-year mean. Amongst the largecap F&B players, DLADY appears poised to provide the most generous dividend yields (vs. average of 2%) while also offering the highest ROE of c.130%. However, the low liquidity of stock may deter some investors.

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 - 28 Feb 2019