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Dynasty Ceramic

Start accumulating ahead of demand recovery

Dynasty Ceramic Plc (DCC)

Investment thesis

We have upgraded our DCC rating from HOLD to BUY with a new YE14 target price of Bt68, which reflects an upward revision to our FY14 profit forecast and a discount rate cut from 11.6% to 10.5%, due to lower BLS assumptions for the risk-free rate (from 4.5% to 4.2%) and market return (from 12.8% to 12.6%). The risk-reward proposition is attractive—DCC offers a high yield of 6.2percent for FY15 and demand will recover, we believe.

FY15 earnings upgrade on industry-wide demand recovery

Ceramic tile demand in Thailand will recover in FY15, driven by a better economy, particularly upcountry. Industry-wide sales of ceramic tiles in Thailand have been in decline for two years—down 4% to 180m sq.m in 2013 and forecast to dip 2% to 177m sq.m this year. Historical data indicate a normal demand growth rate of 3% per year (the 2003-13 CAGR). Industry-wide domestic sales volume slipped by 4% YoY in 1Q14 and by 1% YoY in April 2014.

We are optimistic over DCCs FY15 earnings outlook, as upcountry sales comprise 80% of its revenue. We have revised up our FY15 core profit forecast 4% to reflect a 2% increase to our sales assumption and a 0.3% lower SG&A/sales expectation. Our new model points to 8% profit growth for FY15 following flattish YoY FY12-14 numbers.

Positive surprise! Record high mean sale price

DCC proved the success of its strategic shift into higher value products (bigger sizes, new designs and new printing technology). Its mean sales price has risen from Bt136/sq.m in FY13 to Bt139 in 1Q14 and a new record of Bt141 in April. The proportion of new products in the sales mix has expanded from 4percent for FY13 to 9percent for 1Q14. DCC targets 15-18percent for FY14. Note that we model for mean sales prices of only Bt139/sq.m for FY14 and Bt141 for FY15.

2Q14 profit the nadir; 2H14 earnings will beat the historical pattern

Historically, DCC's July-Dec earnings comprise about 44% of its full-year number. However, we expect the 2H14 profit to comprise 51% of our FY14 forecast because of weak 1H14 sales (sales volume was down 9% YoY in 1Q14 and is expected to be flat YoY in 2Q14). 2Q14 will be the weakest quarter of the year (down YoY and QoQ). However, DCC is expected to resume YoY and QoQ bottom-line growth in 3Q-4Q14.

To post Bt2.39 DPS for 2Q-4Q14 and record quarterly DPS for 1Q15

We anticipate combined DPSs of Bt2.39 for 2Q-4Q14 operations (Bt0.74 for 2Q14, Bt0.81 for 3Q14 and Bt0.84 for 4Q14), implying an attractive simple yield of 4.2%. The payout rate is at least 100%, supported by a healthy balance sheet (the emd-March net gearing ratio was only 0.2x). We expect DCC to pay an all-time high DPS for 1Q15, as we anticipate a record 1Q15 profit (high season plus a demand recovery).

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