DLADY’s 1HFY22 results missed expectations. 1HFY22 topline grew 18% YoY (partly thanks to price hikes) but PATAMI declined by 5%, indicating that the price hikes were not enough to offset higher input costs. We expect a weak 2H on account of the absence of major festivities and cost pressures. We cut our FY22F/FY23F earnings forecasts by 19%/4%, lower our TP by 21% to RM28.20 (from RM35.60) and downgrade our call to UNDERPERFORM from MARKET PERFORM.

Below expectations. 1HFY22 PATAMI came in at 52% of our, and 49% of consensus, full-year estimate. However, we deem the results below expectation as we expect a weaker 2H on the back of margin erosion.

1HFY22 topline grew 18%, underpinned by the reopening of the economy, strong Ramadhan sales and price hikes in 2QFY22. However, PATAMI declined by 5% as the price hikes were not enough to offset the increase in input costs. In other words, the company opted to absorb a significant portion of the higher input costs.

Outlook. Moving forward, we are cautious for 2HFY22 due to the absence of major festivities and creeping inflation. DLADY enjoys good leverage from the strength of its brands, and the dietary need and recognition of the goodness and nutritional value of milk is rising. Its dairy products are also popular amongst Malaysians. Hence, we expect its sales to continue to be robust and normalise to pre-pandemic level averaging around the RM550m range in the 2H. However, cost pressures will persist with extended supply chain disruptions as well as a seemingly prolonged Russian-Ukraine war. We also believe DLADY has moral as well as ESG obligations not to excessively raise prices of its staple food products that make up the daily diet of the population. However, on a positive note the Global Dairy Trade price index have been trending downwards since June 2022 similar to the CY21 levels and we expect recovery in margins for FY23.

Post results, we cut our FY22F/FY23F earnings forecasts by 19%/4% as we tone down our assumptions; (i) GP margin at 31% for FY22F (34% previously) and 33% for FY23F (from 35%), (ii) sales growth at 5% for FY22F (from 1%) while unchanged for FY23F at 1%.

Downgrade to UNDERPERFORM with a lower TP. We lower our TP to RM28.20 (from RM35.60) as we ascribe a lower FY23F PER of 22x (from 28x previously) to reflect a higher risk premium for the industry as a whole on a potentially prolonged elevated high inflationary environment, which is also more consistent with the industry’s historical average 1-year forward PER. There is no adjustment to TP based on ESG for which it is given a 3-star rating as appraised by us.

Risks to our call include: (i) normalization of food commodity prices, (ii) stronger ringgit resulting in lower cost of imported raw materials.

Source: Kenanga Research - 24 Aug 2022