The Nation



Dynasty Ceramic

Weak outlook

Dynasty Ceramic Plc (DCC)

Investment thesis

In the short-term, DCC's share price will be supported by a good dividend yield for 1Q14 (XD in early May; we expect a payout of Bt0.93, which implies a 7.2% annualized yield). However, the earnings outlook is weak. A good entry price would be at or below Bt50, implying a yield gap of 4.5% to the one-year bank deposit rate, which is close to DCC's FY06-13 mean yield gap of 5.0%. The stock trades at an FY14 PER of 15.8x (1.0SD above its FY02-13 mean). Our HOLD rating stands with a YE14 target price of Bt50 (DDM framework, 11.6% discount rate).

Weak domestic demand

Thai domestic sales volumes of ceramic tiles have declined in YoY terms for eight straight months since July 2013—down by 5% in Jan and by 4% in Feb, according to the Department of Industrial Economics. Industry-wide 1Q14 sales will post a dip of 4% YoY to 47m sq.m (following 8% YoY slippage in 4Q13). Note that the first-quarter is normally the best period of the year for ceramic tile demand in Thailand (27% of full-year sales volume). Demand in 2014 is forecast to remain weak following a 4% contraction to 180m sq.m in 2013 (the first year that demand fell after three years of YoY growth, 2010-12).

Unexciting FY14 earnings outlook

We expect DCC to post FY14 core profit growth of only 3% (the street projection is 5%). The introduction of fat-GM products (bigger sizes with new designs) will mitigate the effect of the sales volume contraction for small-sized ceramic tiles (commercial grade). The new products pushed up the mean selling price to a new high of Bt136/sq.m FY13; we assume a mean price of Bt138/sq.m for FY14.

1Q14 earnings high season won't see YoY growth

DCC should post a 1Q14 core profit of Bt407m, down 1% YoY but up 57% QoQ on seasonality. Despite the seasonal surge, we expect sales volume to post a 5% YoY decline to 15.4m sq.m. Sales value is assumed at Bt2.1bn, down 1% YoY but up 20% QoQ. Mean sales price growth (2% YoY and 1% QoQ to Bt137/sq.m) will mitigate the effect of weak sales volume. We expect reported GM to fatten by 50 bps, both YoY and QoQ, to 41.0percent for 1Q14, led by a rising proportionate contribution from fat-margin tile products. DCC's run rate rose from 70% in 4Q13 to 80% in 1Q14. The DPS for 1Q14 is assumed at Bt0.93 (the peak DPS for FY14).

Unfavorable 2Q-3Q14 earnings and dividend outlooks

Management aggressively targets achieving YoY profit growth in 2Q14. We are skeptical, as there aren't any signs of a recovery in demand on the horizon. Core profit is anticipated to dive 20% QoQ in 2Q14 and fall a further 7% QoQ in 3Q14, led by seasonality. The two quarters are expected to together comprise 44% of the FY14 profit. Also, the dividend payouts for 2Q-3Q14 are anticipated to drop QoQ.

Comments conditions

Users are solely responsible for their comments.We reserve the right to remove any comment and revoke posting rights for any reason withou prior notice.