Dynasty Ceramic

Dynasty Ceramic Plc (DCC)

Investment thesis
We recommend accumulating DCC ahead of an attractive (simple) yield of 4.1% for 2Q-4Q14 operations and an expected record DPS for 1Q15. DCC offers a high yield of 6.1% for FY15. Weak 2Q14 numbers (to be posted in late July) are behind us. We anticipate YoY profit growth of 22% for 2H14 and 8% for FY15 (flattish in FY13-14) with scope for upside from a demand recovery and a fatter GM. Our BUY rating stands with a DDM-derived (10.5% discount rate) YE14 target price of Bt68.
2Q14 results will be the nadir of the year
Our model indicates a core profit of Bt302m for 2Q14, down by 10% YoY and 15% QoQ—the weakest quarter of the year, due to low season and poor demand, particularly in April-May. Industry-wide domestic sales volume declined a further 1% YoY in April-May (following 4% YoY slippage in 1Q14). DCC’s sale volume is likely to have diminished 5% YoY to 13.3m sq.m in 2Q14. Sales are estimated at Bt1.9bn, down by 2% YoY and 8% QoQ. Mean sales price growth was 2% YoY and QoQ to a record of Bt141/sq.m. GM probably rose by 50 bps QoQ (but fell 1.4% YoY) to 40.5% on a run rate increase from 80% in 1Q14 to 85% in 2Q14.
Earnings recovery in 2H14 (bucking the historical pattern)
Although the historical data suggest poor July-Dec earnings (an average of 44% of full-year profit, FY06-13), the 2H14 numbers will diverge from the typical pattern, as 1H14 results were so weak. DCC’s 2H14 profit will comprise 51% of the FY14 total, we believe. The firm will resume YoY and QoQ bottom-line growth in 3Q-4Q14. The YoY sales recovery started in June. We expect the release of pent-up demand in 2H14 and FY15—industry-wide demand for ceramic tiles in Thailand has declined for two straight years, 2013-14 (the 2003-13 tile demand CAGR was 3%).
Scope for upside to GM from a record high mean sales price
Management targets GM of 42% for FY14 and 43% for FY15—slightly above our assumptions of 41% for FY14-15. Our sensitivity analysis suggests 4% upside to our earnings model for every 1% that GM exceeds our assumption. DCC will expand its (fat GM) value-added product sales to boost GM—the proportion of new products (bigger sizes, new designs and new printing technology) in the sales mix is targeted to rise from 9% in 1Q14 to 15% in FY14 and 20% in FY15. DCC reported new record mean sales prices for 1Q14 and 2Q14.    
Good yield play
We anticipate quarterly DPSs of Bt0.74 for 2Q14 (XD and payment in Aug), Bt0.81 for 3Q14 (XD and payment in Sept) and Bt0.84 for 4Q14 (XD in March 2015). The net-gearing ratio should be posted at 0.3x for end-June. The combined DPSs are Bt2.39 (a simple yield of 4.1%). We expect DCC to pay a record DPS of Bt1.03 for 1Q15 from an unprecedented profit for 1Q15 (high season).