Dynasty Ceramic

Dynasty Ceramic Plc (DCC) 

Investment thesis

DCC’s sales are recovering, driven by the release of pent-up demand. Sales will rise YoY in 1Q15, as farmers spend after being paid for crops harvested in late 2014. Our model points to core earnings growth of 10% in FY15 following a 6% dip for FY14. DCC offers a dividend yield of 5.6% for FY15. Our BUY rating stands with a new YE15 target price of Bt6.7 (down from Bt6.8 to reflect earnings model adjustments), based on a DDM framework (an unchanged 10.5% discount rate and 2% terminal growth). 

Conservative earnings growth forecast

We have cut our FY15 core profit forecast by 5% following weak FY14 results (6% earnings slippage; we had earlier modeled for a flattish YoY core profit). We conservatively assume 5% sales growth for FY15 (volume up 3%, mean sales price up 2% to Bt139/sq.m). GM should be sustained at 42% (DCC guidance). Marketing cost cuts are expected to trim 90 bps YoY from the SG&A/sales ratio, which we assume at 19.3% this year. Profit growth of 10% is modeled for FY15 following sluggish earnings in FY12-14. There is scope for upside to GM from a rising proportion of fat-GM products in the sales mix and a lower natural gas cost (if GM were to beat our model by 1%, there would be 5% upside to our FY15 earnings projection).

What if DCC were to achieve its FY15 business plan targets?

Management targets sales growth of 12% for FY15 (volume up 7% to 56m sq.m and mean sales price up 5%). If the firm were to achieve its targets, there would be 7% upside to our FY15 profit forecast to Bt1.4bn (core profit expansion of 17% YoY).   

More fat-margin products to be launched

DCC plans to expand its value-added product sales in order to boost mean sales price and GM. The proportion of new products in the sales mix has risen from almost nothing in FY13 to 13% in FY14. The firm targets 20% for FY15. In Jan 2015, DCC launched a new 12*12-inch digitally-printed tile with a sales price that is about 30% higher than for flat screen-printed products and a GM of around 43%. Management targets 40% sales volume growth for value-added products, but only 3% sales volume growth for conventional tiles. 

High hopes for 1Q15 bottom-line rebound

Management said sales rose 2% YoY in Jan 2015 following YoY slippage for six straight quarters, 3Q13-4Q14. Sales in the Northern and North-eastern regions of Thailand (which together comprise ~50% of DCC’s sales) 

resumed YoY expansion of 15% and 10%, respectively, for the month. Based on the guidance, we expect strong YoY and QoQ earnings growth for 1Q15, driven by the 

release of pent-up demand and seasonality, so the DPS for 1Q15 operations should be good. Natural gas (~30% of DCC’s cost of production) dipped 5% MoM in Dec 2015

and is expected to fall further in 1H15 (the next gas price adjustment is slated for April; the price will decline substantially, we believe).