DLADY remained robust with 1QFY22 PATAMI meeting our/market expectations on account of stable margin. While we expect top-line to remain robust with the economy reopening, we are cautious on earnings on account of volatile input prices which is likely to prolong well into CY23. However, after moving forward our valuation base to FY23E, TP is raised to RM35.60 and we reiterate our MARKET PERFORM call.

In line. 1QFY22 PATAMI of RM21m accounted for 25% each of both our and market estimates. A DPS of 25.0 sen was declared, in line with our expectation of full FY22 DPS of 50.0 sen.

YoY, top-line surged 16% to RM300m as sales remained robust, surpassing its pre-pandemic days – underpinned by renewed economic activities with the easing of restrictions, regional expansion and price increases to offset inflationary headwinds. GP margin remained solid at 34% which we believed is attributed to higher demand for its products and better operational efficiency coupled with a slight uptick in EBIT margin by 40bps to 9%, attributed to better costs control. Surging top- line and stable margins resulted in PATAMI ending 22% higher to RM21m.

QoQ, top-line remained flattish but we take it positively given that historically 4Q had always been a strong quarter for DLADY. PATAMI ended 89% down as 4QFY21 saw an exceptional gain of RM155m - stripping of these gains, 1QFY22 PATAMI fell by a smaller quantum of 28%. GP margin saw 260bps erosion coming from elevated raw materials prices with EBIT margin eroding 5ppt coming from higher opex.

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. Products demand should be sustained given their trusted dairy nutrition and essential component status in 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 provide nourishment to 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. Moving forward, we expect GP margins to be constant around this current level given its strategic move to front-load its inventories to combat inflationary and unfavourable currency headwinds.

Post results. As results are in line, we make no changes to our FY22E earning but revised slightly down FY23E earning by 3% to RM85m.

Maintained at MARKET PERFORM. As we moved forward our valuation base to FY23E, TP is raised to RM35.60 (from RM34.75) pegged to its FY23E PER of 26.7x (implying a 0.5SD below its 5-year mean). Supply is expected to match demand by end of CY23 which will see challenging inputs prices well into next year coupled with on-going geo-political risks which is exacerbating the supply risks. With uninspiring dividend yields, we maintained it at MARKET PERFORM.

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

Source: Kenanga Research - 25 May 2022