Dynasty Ceramic

Investment thesis

We like DCC in anticipation of a ceramic tile demand recovery in FY15. Our model points to earnings growth of at least 8% in FY15 following flattish FY13-14 numbers. If the cost of natural gas were to fall there would be upside to our forecast. We expect an attractive (simple) dividend yield of 4.4% for 3Q14-1Q15 (combined DPS of Bt2.56). DCC offers a dividend yield of 6.0% for FY15. Our BUY rating stands with a DDM-derived YE15 target price of Bt68 (10.5% discount rate and 2% terminal growth). 

Sales firmed up in 3Q14; to expand in 4Q14-1Q15

Sales should be posted flat YoY at Bt1.7bn for 3Q14 following YoY slippage, 3Q13-2Q14 (down by 4% in 3Q13, by 8% in 4Q13, by 7% in 1Q14 and by 3% in 2Q14). We estimate a core profit of Bt300m for the quarter, up 2% YoY but down 6% QoQ. The mean sales price is assumed at Bt138/sq.m, up 2% YoY, which should have offset the effect of YoY volume slippage (industry-wide domestic volume sales dipped 1% YoY in 3Q14). DCC guides for YoY and QoQ profit growth in 4Q14 (the normal pattern is QoQ slippage in the fourth-quarter. Strong earnings growth is expected for 1Q15, led by seasonality and fundamentally stronger demand. 

Committed quarterly dividend payment

The dividend payout rate was reaffirmed at 100%—we assume DCC’s end-Sept net-gearing ratio at only 0.3x. We anticipate a quarterly DPS of Bt0.73 for 3Q14 (XD and payment in Sept) and Bt0.80 for 4Q14 (XD in March 2015). A record DPS of Bt1.03 should be paid for 1Q15 from an unprecedented profit for the period.     

The cost of gas should fall 

Natural gas comprises about 30% of DCC’s cost of production—its highest single cost. The spot price of Brent crude has fallen about 25% YTD to less than US$91/bbl. The price of pooled Thai natural gas is loosely benchmarked against the price of crude (40% price movement elasticity) with quarterly or six-monthly price adjustments (depending on the gas field). We can expect lower gas prices in the future, which would boost DCC’s GM and profit. We currently conservatively assume a flat YoY GM of 41% in FY15. Our sensitivity analysis suggests 4% upside to our earnings model for every 1% that GM exceeds our assumption.

FY15 management target means upside to our model

Thai industry-wide demand for ceramic tiles is expected to rebound to around its FY03-13 CAGR of 3% in 2015 following slippage of 4% in 2013 and a forecast 2% dip in 2014. DCC has the capacity (80% run rate in FY14) to cater to the demand recovery. Management targets sales growth of 10% (volume up 7%, mean sales price up 3%) against 6% sale growth in our model. FY15 Its GM target is 43%. DCC will expand value-added product sales to boost GM—the proportion of new products in the sales mix is targeted to rise from 15% for FY14 to 20% for FY15. Our scenario analysis suggests 12% upside to our earnings model if DCC were to achieve its FY15 sales target.