Dynasty Ceramic

Dynasty Ceramic Plc (DCC)
 

Below expectations: DCC reported a 1Q12 net profit of Bt373m, up by 2% YoY and 48% QoQ. The number was a new record, but it fell 15% short of our estimate and was 11% below the consensus, mainly due to lower revenue and GM than expected.
The firm announced a DPS of Bt0.91 for 1Q12, a 5.6% annualized yield (XD on May 8; payment on May 23).
Results highlights: The low single-digit YoY growth in 1Q12 profit was due to a 4% rise in sales. Net margin was flat YoY at 18%, as lower SG&A expenses were sufficient to offset the effect of slimmer GM (from 42% in 1Q11 to 40% in 1Q12). The 2% YoY dip in GM was a negative surprise to us; it may have been due to high energy costs during the quarter. On a QoQ basis, strong 1Q12 earnings growth was driven by record revenue of Bt2.1bn (up 28% QoQ), thanks to a post-flooding volume recovery and seasonality. The balance sheet was solid—a net cash position at end-March 2012.
Outlook: We forecast that DCC will post YoY profit growth for 2Q12, but QoQ expansion is unlikely, given seasonality—first-quarter sales are normally the highest of the year.
What’s changed? 1Q12 profit accounts for 23% of our full year forecast. We see downside risk to our earnings projection, as the first-quarter has historically contributed about 30% of the full-year profit. We will revisit our model. GM of 40% for 1Q12 is short of our assumption of 43% (DCC’s target is 45%). There might also be downside to our DPS assumption. 
Recommendation: We have downgraded our rating to HOLD (from TRADING BUY). For the time being, we maintain a YE12 target price of Bt72, based on a DDM framework—an 11.6% discount rate and 1% terminal growth. The disappointing 1Q12 result will generate negative sentiment toward the stock. DCC currently trades at a PER of 16.6x, which is its first-quarter high season level and 2SDs above its FY06-11 mean.