DLADY remained robust with FY21 core earnings above our expectation on account of better-than-expected GP margin. While we expect top-line to remain robust with the economy reopening, we are cautious on earnings on account of volatile input prices. TP is reduced to RM34.75 and downgrade to MARKET PERFORM.

Above expectation. FY21 PATAMI ended at RM248m underpinned by an exceptional gain of RM155m resulting from the completion of the sales of land and manufacturing facilities in PJ. Stripping these gains, Core Net Profit ended at RM93mm making up 116%/99% of our/consensus full-year estimates. The positive deviation is attributed to its strong GP margin of 35% vs. our initial estimate of 32% and a lower ETR. As expected, no dividend declared in this reporting quarter, with full-year DPS ending at RM0.50 (below our initial estimate of RM0.60).

YoY, top-line grew 3.0% ending at RM1.13b as sales remained robust on par with its pre-pandemic days. Despite the stricter COVID-19 control measures, the Company has been able to operate at full capacity, driving the penetration of milk consumption consistently at affordable price points given its status as an essential component of dietary nourishment. GP margin saw a 3ppt uptick, indicating better product mix and hedging activities. EBITDA margin saw a 4ppt uptick to 14.8% coming prudent management hence lower operating cost (-2%). Net profit ended at RM248m (+239%) due to the exceptional gain coupled with a lower ETR of 12.8%.

QoQ, top-line improved by 3.3% surpassing pre-pandemic levels at RM300.4m boosted by the easing of restrictions and pent-up demand. Surprisingly, GP margins saw 2ppt improvement to 36.6% while EBITDA margin saw a 4ppt increase to 17.3% coming from prudent management. The strong gain for the quarter was also attributed to lower ETR of 7.3% with Core Net Profit ending at RM28.2m (+38.4%).

An essential nutritional item. 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 reopening of the economy. DLADY has good leverage from the strength of its brands, the increasing need and recognition of the goodness and nutritional value of milk, as well as its complementing dairy products amongst Malaysians. The Company looks to remain supportive of the local dairy farmers and increase the quantity and quality of local fresh milk. Demand should be sustained given it’s a trusted dairy nutrition and an essential component of dietary nutrition. However, margins still remain challenging in the immediate term as global dairy prices are expected to be on uptrend into CY23. With its focus to nourish Malaysians at affordable prices, we believe Dutch Lady would be prudent with any price hikes, of which could be insufficient to offset the elevated commodity costs.

Post results, we revised downwards our FY22E earnings by -2% to RM79m after imputing lower GP margin (34% vs FY21: 35%) and we also introduce our FY23E earnings. We also reduced our FY22E DPS to RM0.50 (from RM0.80) on account of its investments in Bandar Enstek Development Project, which is expected to be internally funded.

Downgrade to MARKET PERFORM. TP is reduced to RM34.75 (RM40.20 previously) pegged to its FY22E PER of 28x (implying 0.5SD below mean). Despite top-line remaining robust due to its sticky products demand, margins will be challenging given the volatile input prices. Coupled with uninspiring dividend yields, we downgrade it to MARKET PERFORM.

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

Source: Kenanga Research - 24 Feb 2022