DLADY’s 9MFY23 results disappointed on lingering cost pressure. However, the stabilising dairy raw material cost and improving operational efficiency should boost its margins going forward. We cut our FY23-24F net profit forecasts by 11% and 4%, respectively, trim our TP by 2% to RM26.00 (from RM26.60) but maintain our OUTPERFORM call.

Its 9MFY23 core net profit of RM50m (-26% YoY) came in below expectations at only 66% of both our full-year forecast and the full-year consensus estimate. The key variance against our forecast came from cost pressure. As expected, no dividend was declared during the quarter. For the full financial year, we expect the group to declare a total 75.0 sen dividend (YTD: 25.0 sen), reflecting a 70% payout ratio, in line with FY22.

Results’ highlights. YoY, its 9MFY23 revenue advanced 10% driven by strong demand for dairy products and selective price increases. However, its core net profit plunged 26% due to higher inputs cost during 1HFY23 and the MYR's depreciation against the USD.

QoQ, its 3QFY23 revenue improved by 6% driven by higher sales volumes. However, its core net profit contracted 31% as higher distribution and operating expenses and effective tax rate more than offset lower dairy raw material costs.

Forecasts: We cut our FY23-24F net profit forecasts by 11% and 4%, respectively, to reflect higher distribution and other operating costs.

Correspondingly, we lower our TP by 2% to RM26.00 (from RM26.60), based on an unchanged average industry forward PER of 22x. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

However, we continue to like DLADY for: (i) its resilient top line driven by the steady demand for staple food products, even amid the global economic uncertainties, (ii) its ability to offset rising costs through price adjustments, thanks to strong brand equity, and (iii) its well-established brand and the escalating recognition of the nutritional advantages of its dairy product. Maintain OUTPERFORM.

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 - 23 Nov 2023