Tiling a recovery story BUYDynasty Ceramic Plc (DCC)
DCC is a massive laggard, trading 18% below its 2012 peak while the
market is 28% higher in the same period. Successful operational fix in
the past 12 months will restore the company’s growth story. We expect
DCC’s earnings growth to surge to 25% this year, from near zero last
year, in our revised forecast. Our new TP of Bt70 implies 26% capital
gain, which would be further sweetened by a 7% dividend yield. BUY.
Strong operational improvements. Yesterday's analyst meeting led by Khun
Roongroj Saengsastra, Chairman & CEO, revealed that DCC successfully raised average
product selling price from Bt129/sqm in 2012 to Bt135/sqm in mid-Jan 13 and
Bt139/sqm in mid-Feb 13. Despite the price hike, sales volume picked up strongly by
12% YoY in January. Backing for this was provided by three elements. First, market
demand was strong. Second, it introduced a new product in 4Q12 that met with
customer approval. This is a "rectified floor ceramic tile" sized 16"x16", for which the
selling price is almost 30% below the price for imported granito tiles, and thus will lure
some share away from the imported granito tile market. Thirdly, last year's logistics
problems were solved by shortening the payment terms and using larger trucks.
Positive guidance for 2013. DCC targets 10percent sales volume growth and 7% average
selling price (ASP) increase to Bt138/sqm in 2013. Gross margin is expected to edge up
to 40percent from 39.2% in 2012, thanks to better economies of scale, higher ASP and sales
mix optimization. DCC aims to boost the proportion of the 16"x16" rectified floor
ceramic tile size from 3-4% of total sales volume to 35-40%. While the ASP on this
product is 20% above the conventional grade, its production cost is merely 5% higher.
DCC is not concerned about the current boom in modern trade distribution outlets for
home improvement products, as they generate only 2% of total sales from ceramic tile
sales due to space limitation. DCC's in-house outlets, primarily dedicated to ceramic
tiles, offer much broader product range and account for 75% of its sales.
Earnings upgrade. To reflect the stronger outlook, we have raised our forecast by
14% to Bt1.6bn in 2013F and Bt1.8bn in 2014F. Our key assumption changes are: 1) an
increase in ASP to Bt134/sqm (+4% YoY) in 2013F and Bt135/sqm (+1% YoY) in 2014F;
2) a rise in sales volume to 63mn sqm (+8% YoY) in 2013F and 69mn sqm (+8% YoY) in
2014F; and 3) a rise in gas cost by 5%. Our full-year ASP assumptions are more
conservative than company guidance as we see seasonality factors contributing to the
pricing so far in 1Q13. Our sensitivity analysis suggests that every 1% rise in sales
volume and ASP will increase DCC's earnings by 1% and 3.5%, respectively, while every
1% rise in gas cost will hurt its earnings by 1.5%.
Maintain BUY. We raised our 12-month PT to Bt70 (from Bt57), based on 18x PE (+1.5
S.D. over its 10-year PE of 13x) in response to our earnings upgrade. We like DCC for
several reasons: 1) potential earnings upgrade by street (our earnings are 14% above
consensus); 2) hugely laggard play in its sector (DCC -7% vs. SETCONMAT +24% and SET
+34% in the past 12 months); 3) attractive valuation, trading at 14x 13PE vs 3-year EPS
growth at 20%; and 4) compelling dividend yield at 7.0% in 2013F.