Dynasty Ceramic

Dynasty Ceramic Plc (DCC)

Investment thesis: We see a further re-rating ahead—even though DCC’s share price has increased 11% since we upgraded our recommendation (July 28, 2011)—due to its strong mid-term earnings growth profile (a YoY rise in 4Q11 and a record profit in 1Q12). The stock has the potential to return to its 1Q11 high season PER of 17x (it currently trades at an FY12 PER of 16x). We have increased our YE12 target price to Bt67 from Bt62, as we have cut our discount rate to 11.60% from 12.50% to factor in a lower risk free rate (the 10-year bond yield has dropped 90 bps since July 2011)—our DDM’s terminal growth rate remains 1%. TRADING BUY!
Moderate 4Q11 result; a record high profit in 1Q12: We expect DCC to post a core profit of Bt265m for 4Q11, up 7% YoY but down 8% QoQ (due to seasonality and logistics problems during the 4Q11 flooding). Despite the flooding, sales volume should have increased 7% YoY, facilitating strong YoY earnings growth (beating the broad SET). We anticipate that DCC will report a new record profit for 1Q12, driven by seasonality, 10% capacity expansion in 2H11 (in Aug and Nov 2011) and post-inundation demand for building materials for reconstruction.
Product mix adjustments are boosting GM: In FY11, the firm increased production of 16*16-inch tiles, which carry fatter margins than its standard 12*12-inch tiles. Management targets GM of 44% for FY12 (higher than our model of 43%). The proportion of high-GM products in the sales mix increased from 23% in FY10 to 32% in 3Q11. DCC plans to increase the proportion further to 40% this year. In that case, GM and profit would beat our projections—FY12 net earnings would be 4% above our model—and DPS would rise from Bt3.79 to Bt3.94.
FY12 growth guidance: Management targets 12.5-15% revenue growth for FY12. Flood damage is expected to push up replacement demand (against demand for tiles for new buildings) as a proportion of sales from 65% in FY11 to 75% this year. There is also scope for GM upside (from DCC’s 44% target), as the average sales price could exceed guidance and production cost control (body composition, frits and pigments). The firm targets revenue hitting Bt10bn in FY14 (8% above our forecast) and a record high GM of 46%. The 100% payout policy will be maintained.