DLADY’s FY22 results beat expectations on writeback of prior year’s income tax provision in the fourth quarter. While its top line was robust on the reopening of the economy, restrained price hikes resulted in margin erosion. We cut our FY23F earnings by 9%, reduce our TP by the same quantum to RM29.78 (from RM32.60) and maintain our MARKET PERFORM call.

FY22 results beat our forecast and consensus estimate by 16% and 14%, respectively. The variance against our forecast came largely from writeback of prior year’s income tax provision in the fourth quarter. Its total DPS in FY22 is 50.0 sen, the same as for FY21.

YoY, revenue jumped 18% on the reopening of the economy, strong festive sales, price hikes and some market share gains. However, gross profit was flattish with margin contracting by 5ppts (from 35% to 30%) as restrained price hikes failed to fully pass on higher prices of inputs such as milk solid. Not helping either was the inflated costs of imported inputs due to a weaker MYR. EBIT fell 24% on higher depreciation expenses. However, its core net profit only fell 4% on writeback of prior year’s income tax provision.

QoQ, revenue rose 7% on strong year-end festive sales. However, EBIT contracted sharply by 67% as it recognised high-cost inventory. Core net profit only fell 7%, thanks again to the writeback of prior year’s income tax provision as mentioned above.

We cut our FY23F earnings by 9% on account of high-cost inventory in the books. The situation should improve in FY24 (as reflected in our newly introduced FY24F numbers) in the absence of high-cost inventory and assuming food commodity prices stabilise.

We lower our TP by 9% to RM29.78 (from RM32.60) based on an unchanged FY23F PER of 22x which is consistent with the industry’s average forward PER. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like DLADY for: (i) its resilient top line underpinned by steady demand for staple food items despite an uncertain global economic outlook, (ii) the upside potential to its margins (beyond FY23) given the softening food commodity prices, (iii) its strong branding. However, it struggles to fully pass on higher input costs given that the B40 group makes up a large proportion of its customer base. Maintain MARKET PERFORM.

Risks to our call include: (i) volatile food commodity prices, (ii) further weakening of MYR resulting in higher cost of imported raw materials, and (iii) down trading by consumers.

Source: Kenanga Research - 27 Feb 2023