Dynasty Ceramic

Dynasty Ceramic Plc (DCC)

Investment thesis
In the short-term, DCC’s share price will be supported by a good dividend yield for 1Q14 (XD in early May; we expect a payout of Bt0.93, which implies a 7.2% annualized yield). However, the earnings outlook is weak. A good entry price would be at or below Bt50, implying a yield gap of 4.5% to the one-year bank deposit rate, which is close to DCC’s FY06-13 mean yield gap of 5.0%. The stock trades at an FY14 PER of 15.8x (1.0SD above its FY02-13 mean). Our HOLD rating stands with a YE14 target price of Bt50 (DDM framework, 11.6% discount rate).
Weak domestic demand
Thai domestic sales volumes of ceramic tiles have declined in YoY terms for eight straight months since July 2013—down by 5% in Jan and by 4% in Feb, according to the Department of Industrial Economics. Industry-wide 1Q14 sales will post a dip of 4% YoY to 47m sq.m (following 8% YoY slippage in 4Q13). Note that the first-quarter is normally the best period of the year for ceramic tile demand in Thailand (27% of full-year sales volume). Demand in 2014 is forecast to remain weak following a 4% contraction to 180m sq.m in 2013 (the first year that demand fell after three years of YoY growth, 2010-12). 
Unexciting FY14 earnings outlook
We expect DCC to post FY14 core profit growth of only 3% (the street projection is 5%). The introduction of fat-GM products (bigger sizes with new designs) will mitigate the effect of the sales volume contraction for small-sized ceramic tiles (commercial grade). The new products pushed up the mean selling price to a new high of Bt136/sq.m FY13; we assume a mean price of Bt138/sq.m for FY14.
1Q14 earnings high season won’t see YoY growth
DCC should post a 1Q14 core profit of Bt407m, down 1% YoY but up 57% QoQ on seasonality. Despite the seasonal surge, we expect sales volume to post a 5% YoY decline to 15.4m sq.m. Sales value is assumed at Bt2.1bn, down 1% YoY but up 20% QoQ. Mean sales price growth (2% YoY and 1% QoQ to Bt137/sq.m) will mitigate the effect of weak sales volume. We expect reported GM to fatten by 50 bps, both YoY and QoQ, to 41.0% for 1Q14, led by a rising proportionate contribution from fat-margin tile products. DCC’s run rate rose from 70% in 4Q13 to 80% in 1Q14. The DPS for 1Q14 is assumed at Bt0.93 (the peak DPS for FY14).
Unfavorable 2Q-3Q14 earnings and dividend outlooks
Management aggressively targets achieving YoY profit growth in 2Q14. We are skeptical, as there aren’t any signs of a recovery in demand on the horizon. Core profit is anticipated to dive 20% QoQ in 2Q14 and fall a further 7% QoQ in 3Q14, led by seasonality. The two quarters are expected to together comprise 44% of the FY14 profit. Also, the dividend payouts for 2Q-3Q14 are anticipated to drop QoQ.