1Q19 core net profit of RM34.3m (-8%) missed expectations due to lower-than-expected sales and margins recovery. Dividends however are deemed as within. The group’s strategy to reduce ASP for higher sales volume may pressurise top-line but better commodity prices may linger. We keep our earnings estimates unchanged for now, pending updates from an upcoming meeting. Maintain OUTPERFORM and TP of RM68.30.

1Q19 missed. 1Q19 core net profit of RM34.3m is below our, and consensus, expectations, making up 22% of both full-year estimates. We had anticipated a c.30% contribution to FY19E earnings due to seasonal weakness during the mid-year. The miss is owing to the poor top-line delivery and slower-than-expected margin recovery. An interim dividend of 50.0 sen was declared, which we deem to be within expectation. Our anticipated 220.0 sen FY19E payout represents a ratio of c.100%.

YoY, 3M19 sales of RM265.0m (-0.4%) dipped slightly as a result of downward ASP adjustments to stimulate volume growth. Gross profit margin improved slightly to 40.8% (+0.1ppt) as prices for milk powder saw better averages. However, core net earnings fell by 8% to RM34.3m in lieu of the higher distribution expenses incurred, likely arising from the abovementioned volume growth.

QoQ, 1Q19 revenue declined by 2%, possibly due to the same abovementioned lower ASP. However, gross profit grew by 4%, thanks to better comparative input costs (margin expanded by 2.4ppt). Overall, this translated to the 14% increase in core net earnings.

Between higher market share and higher earnings. We believe the group’s strategy to reduce ASP in exchange for volume growth is to pursue a greater market share. This was proven challenging in the past with consumer sentiment registering at below “optimistic” level, according to the Malaysian Institute of Economic Research. However, a saving grace could be seen from better milk price averages, keeping profitability afloat, mainly from better average anhydrous milk fat prices (April 2019 6-mth average reported at USD5.4k/mt or -17% YoY.

Source: Global Dairy Trade). Hedging practices could provide some buffer against the volatility of recent price swings and keep production costs at manageable levels.

Post-results, we leave our FY19E/FY20E numbers unchanged for now, as we await updates from an upcoming meeting with management. However, there could be possible downside bias adjustments to our top-line assumptions. Note that if we cut earnings by 5% to reflect the weakness in sales growth, our call has downside risks.

Maintain OUTPERFORM and TP of RM68.30. Our TP is based on an unchanged 31.0x FY19E PER, which is closely in line with the stock’s +1.0SD over its 3-year mean. In the large-cap F&B space, we value DLADY at a premium against our ascribed 30.0x Fwd. PER on F&N, given DLADY’s better dividend yields (3.4-3.6%, vs. 2.1-2.3%) while also offering the highest ROE of c.130% amongst its peers. However, the low liquidity of stock may deter investors. The lack of management guidance could also cloud appetite for the stock, which we hope may improve following an upcoming meeting.

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 - 26 Apr 2019