DLADY’s 1QFY21 earnings came in within our estimates (but below consensus). While top-line remained robust, earnings were hit by higher expenses and persistently high raw materials costs. TP is raised to RM35.65 as we roll over our valuation base to FY22E. Fairly valued, we maintain DLADY at MARKET PERFORM.

Within expectations. 3MFY21 CNP of RM17m came in within our expectations (at 21% of full-year estimate vs. consensus of 18%). Quantum of dividend declared for the quarter is below our expectation at 25.0 sen/share (vs. our earlier expectation of 45.0 sen for the quarter.

Higher expenses. YoY, 3MFY21 top-line of RM259m grew moderately by 3%, likely driven by the liquid milk product portfolio with production capacity at 100% despite ongoing pandemic challenges. EBITDA fell 10% to RM32m resulting margin declining 180bps to 12.4% on account of higher overheads & commercialization from increased demand for products. The continued upsurge in global dairy raw prices (GDT price index: +39% YoY) contributed further to the declining margins. Despite ETR remained fairly stable, earnings fell 25% due to higher depreciation expenses as it accelerated depreciation of its assets in the current Petaling Jaya factory.

QoQ, top-line shrunk 11% given the stringent MCO 2.0 from Jan 21 onwards. EBITDA margin improved 90bps to 12.4% on improved cost efficiencies and lower dairy prices. CNP fell 16% due to higher depreciation expenses as mentioned above.

Outlook. Moving forward, the group should be able to preserve its sales base on the back of fresh product innovations and strategic pricing strategies, in tandem with the recovery momentum expected in 2H 2021 with successful roll-out of vaccines. Outlook remains positive due to its brand presence and the dietary and nutritional value of milk. However, margins look challenging with persistent global uncertainties that could impact foreign exchange and prices of global dairy raw materials. Notably we observed strengthening in global dairy prices – YTD, both Skimmed Milk Powder (SMP) and Anhydrous Milk Fats (AMF) have surged 13% and 24%, respectively. Given that its new manufacturing facility in Seremban is still a long way off and capex will be funded from internally generated funds we feel that dividend payout could be crimped in the medium term.

Post-results, as results were within expectation, we make no changes to our FY21E/FY22E earnings but DPS estimate is slashed by 22% to 60.0 sen pencilling in a more prudent payout assumptions (48% vs 72% previously).

MP maintained but with a slightly higher TP of RM35.65 (from RM34.55), as we roll over our valuation base to FY22E PER of 28.4x (implying a 1SD below its 5-year Mean). The negative SD is premised on persistent challenging global dairy prices, constrained growth and uninspiring dividend yields. Fairly valued at this juncture, we reiterate our MARKET PERFORM rating.

Risks to our call include: (i) better/weaker-than-expected sales, (ii) better/weaker-than-expected cost environment

Source: Kenanga Research - 25 May 2021