Dynasty Ceramic

9% below our estimate

DCC posted a net profit of Bt272m for 3Q14, down by 8% YoY and 15% QoQ. The result was 9% below our estimate, due to 4% lower sales than assumed and a 50 bps slimmer-than-expected GM. The result was also 7% below the street number, due to slimmer margins than assumed. DCC announced a DPS of Bt0.67 for 3Q14, a 100% payout rate (our estimate was Bt0.73), equal to a 4.6% annualized yield (XD on Nov 11; payment on Nov 27). Surprisingly, the firm announced a split par from Bt1/share to Bt0.1/share (subject to shareholder approval at an EGM on Dec 23).

Results highlights

The YoY profit fall was mainly due to a 3% sales contraction to Bt1.7bn, brought on by lower volume (slow demand for ceramic tiles). Sales volume for the quarter slipped 5% YoY to 12m sq.m, which outweighed the effect of mean sales price growth of 2% YoY to Bt138/sqm (due to a higher proportion of value-added products in the sales mix). GM declined from high base at 41.4% in 3Q13 (the second strongest quarter of FY13) to 40.5% in 3Q14, due to maintenance and a 1% YoY rise in gas costs. GM dipped 0.5% QoQ because of a lower utilization rate. The SG&A/sales ratio dipped 0.1% QoQ to 19.6% in 3Q14.   

The QoQ profit contraction was due to an 11% seasonal sales decline, 50 bps GM slippage and a 0.5% higher SG&A/sales ratio (outlet rebranding expenses)  DCC’s net gearing rose slightly from 0.3x at end-June to 0.4x at end-Sept, due to an 8% QoQ inventory increase during low season. 

Outlook

4Q14 profit should improve YoY, due to the low base set by 4Q13 of Bt259m (the lowest quarterly profit since 4Q11). DCC guides for a QoQ earnings recovery in 4Q14, led by better sales. 

What’s changed? 

9M14 profit comprises 72% of our FY14 forecast and 74% of the street number. We see only negligible downside risk to our model.

Recommendation

The par split should boost the trading liquidity of the stock, which would favor DCC’s share price. The weak 3Q14 results are behind us. We maintain the view that FY15 earnings growth will be driven by the release of pent-up demand for ceramic tiles in Thailand. 1Q15 high season—the best sales quarter of the year—is ahead. We like DCC for its high dividend yield of 6% for FY15. The price of gas is set to decline at the next adjustment, which would boost the firm’s GM and profit. We currently conservatively assume a flat YoY GM of 41% in FY15. Our YE15 target price is Bt68, based on a DDM framework (10.5% discount rate and 2% terminal growth).