Dynasty Ceramic

Dynasty Ceramic Plc (DCC)

Below our estimate: DCC reported a 2Q12 net profit of Bt322m, down by 5% YoY and 14% QoQ. The result was 12% below our estimate; both GM and sales disappointed. The firm announced a DPS of Bt0.79 (100% payout rate) for 2Q12, equal to a 6% annualized yield (XD on Aug 7; payment on Aug 23).
Results highlights: The weak 2Q12 profit was mainly due to GM squeeze—39.2% in 2Q12 against 43.9% in 2Q11 and 39.6% in 1Q12. The GM decline was because of higher gas costs. Revenue inched up 1% YoY to Bt1.9bn, insufficient to offset the effect of a substantially slimmer margin. The SG&A/sales ratio was flat YoY at 18%. 2Q12 sales volume was Bt14.4m sq.m, flat YoY but down 11% QoQ on seasonality. We estimate that the mean sales price rose just by 1% both YoY and QoQ. Net gearing was 0.06x at end-June against a net cash position at end-March.  
Outlook: We forecast that DCC will post flat YoY numbers (best-case scenario) for 3Q12 (down QoQ on seasonality). Sales volume is expected to weaken during third-quarter low season. Gas costs will remain high during the period, but should ease in 4Q12 (a time lag to oil price movements of about six months; the price of Dubai crude dropped sharply in May 2012).
What’s changed? We have cut our earnings forecasts by 6% for FY12 and another 4% for FY13 to factor in the disappointing 2Q12 results. Our GM assumption for FY12 declines from 41% to 39.5%. 1H12 profit accounts for 55% of our new full-year forecast. We expect a consensus earnings projection cut soon, as 1H12 earnings represent only 50% of the street’s current FY12 number (DCC’s first-half bottom-line normally comprises 55-60% of its full-year result).
Recommendation: Our SELL rating stands. We have downgraded our DDM-derived YE12 target price to Bt48 from Bt50 to factor in our forecast cuts (a 14% discount rate and a 1% terminal growth rate). DCC trades at a demanding FY12 PER of 16.8x, 2SDs above its long-term mean. The expected FY12 dividend yield of 6.0% is not attractive enough to offset de-rating risk. We suggest a good entry yield of 7.5-7.7% (near its FY06-11 mean) which implies a share price of below Bt50.