DLADY’s 1HFY21 earnings came in within consensus estimates. Top-line remained robust, with margins improving due to better product mix. TP is raised to RM40.20 pegged to a higher PER of 32x. Upgrade to OUTPERFORM.

Within expectations. 1HFY21 PATAMI of RM44m came in within our expectation/consensus (at 55%47%). No dividends which are historically declared in the 1st and 3rd quarters.

YoY, 6MFY21 top-line of RM543m grew moderately by 3%, driven by the liquid milk product portfolio during the festive season in 2Q. Production maintained capacity at 100% despite ongoing pandemic challenges. On a positive note, gross margins saw improvements (140bps) indicating better product mix and hedging activities. Despite opex seeing a +5% uptick, PBT margin saw a marginal decline (40bps) on account of higher depreciation due to accelerated depreciation of its assets in the Petaling Jaya factory that cannot be transitioned to its new site. Hence, PATAMI was relatively flat at RM44m.

QoQ, top-line saw a +10% uptick given the successful Ramadan campaign. Overall broad improvements can be seen as GP/EBIT margins saw 3%/4% uptick, respectively. As such PATAMI jumped +62% to RM27m.

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 gradual reopening of the economy with the successful roll-out of vaccines. Outlook remains positive due to its brand presence and the dietary and nutritional value of milk. However, in the immediate term, margins will still be challenged by: (i) still volatile commodity prices in 2021 compounded by unfavorable forex. We are still positive on stable commodity prices in FY22, seeing the GDT price index has remained on a downtrend on a MoM basis with 6-month forward contracts looking more or less the same. Given that its new manufacturing facility in Seremban is still a long way off and capex will be funded from internally generated funds, dividend payout could be crimped in the medium term.

Post results, we make no changes to our FY21E/FY22E PATAMI of RM80m both.

Overall upgrade. We raised our TP to RM40.20 (from RM35.65), pegged to a higher FY22E PER of 32x (from 28x) (implying a 0.5SD below its 5-year mean). The higher PER is to reflect its robustness and margins preservation due to better product mix. The negative SD is premised on persistent challenging global dairy prices and uninspiring dividend yields. Overall, we raised our call to OUTPERFORM

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

Source: Kenanga Research - 27 Aug 2021