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Dynasty Ceramic

2Q14 profit exceeded estimate by 6%; recovery in 3Q14

Dynasty Ceramic Plc (DCC)

6% above our estimate

DCC reported a net profit of Bt320m for 2Q14, down by 9% YoY and 15% QoQ. The result was 6% above our estimate—due to a 50 bps fatter-than-assumed GM—but was in line with the consensus.

Management announced a DPS of Bt0.78 for 2Q14 (slightly higher than our assumption of Bt0.74), equal to a 5.3% annualized yield (XD on August 5; payment on August 20).

Results highlights

The YoY profit fall was mainly due to a 3percent sales contraction to Bt1.9bn brought on by diminished volume (slow demand for ceramic tiles). Sales volume for the quarter slipped 5% YoY to 13.2m sq.m, which outweighed the effect of mean sales price growth of 2% YoY to a new record of Bt141/sqm (a higher proportion of value-added products in the sales mix). GM declined from 41.9% in 2Q13 (the strongest GM of FY13) to 41.0% in 2Q14, squeezed by 7% YoY production volume slippage (machine maintenance) and a 4% YoY rise in the cost of gas. Note that in QoQ terms, GM inched up 1% on a higher utilization rate. In a positive sign, the SG&A/sales ratio dipped from 20% in 2Q13 to 19% in 2Q14.

Profit slipped QoQ because of low season—sales declined 8% and the SG&A/sales ratio rose 1.2%. DCC's net gearing increased slightly from 0.2x at end-March to 0.3x at end-June, due to inventory growth during low season. But the balance sheet remains strong.

Outlook

We expect YoY and QoQ earnings growth for 3Q14, driven by stronger sales. There were clear indications of a demand recovery in June (YoY growth in sales). The DPS for 3Q14 should rise YoY and QoQ (our 100% payout ratio assumption stands).

What's changed?

1H14 profit comprises 50% of our FY14 forecast and we see some scope for upside to our earnings model. Although the historical data suggest poor July-Dec earnings (an average of 44% of full-year profit, FY06-13), the 2H14 numbers will differ from the typical pattern, as 1H14 results were unusually weak, due to the consumption decline, which was exacerbated by political chaos.

Recommendation

We like DCC for its generous dividend yield (we expect a 5.6% annualized yield for 2H14, and 6percent for FY15) and its 2H14 earnings recovery story—the release of pent-up demand in 2H14 and FY15. Note that industry-wide demand for ceramic tiles in Thailand has declined for two straight years, 2013-14 (the 2003-13 tile demand CAGR was 3%). Our YE14 target price stands at Bt68, calculated from a DDM framework (a 10.5% discount rate and 2% terminal growth).






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