Dynasty Ceramic
2Q15 results beat our estimates - poor quarterly result outlook ahead
Dynasty Ceramic Plc (DCC)
Above our estimate
DCC posted a net profit of Bt367m for 2Q15, up 15% YoY but down 4% QoQ. The result was 10% ahead of our estimate and 8% above the street’s number, mainly due to better-than-expected GM (an actual 43.3% against the 41.0% of our assumption).
The company announced a DPS of Bt0.056 for 2Q15 (versus our forecast of Bt0.05), implying a simple yield of 1.5% or a 6.0% annualized yield (XD on August 10; payment on August 21).
Results highlights
Good profit growth YoY was driven by a fattened GM (up from 41.0% in 2Q14 to 43.3% in 2Q15 because of a 32% YoY lower energy price, which is connected to the shrunken cost of natural gas) and a lower SG&A/sales ratio (down from 19.2% in 2Q14 to 17.9% in 2Q15). Sales dropped 2% YoY to Bt1.8bn due to weak sales volume (slow demand). On a QoQ basis, April-June is normally low season. Therefore, profit for 2Q15 dipped 4% QoQ due to a 10% plunge of revenue. Its poor top line led to 1.0% higher SG&A to sales. Those factors outweigh the GM gains from 40.6% in 1Q15 to 43.3% in 2Q15. DCC’s net gearing was stable QoQ at 0.1x at the end of June. Inventory was up slightly, 2% YoY and 4% QoQ, to Bt1.5bn.
Outlook
DCC is expected to post a moderate YoY growth for its 3Q15 result, but will surely show slippage QoQ due to lower sales volume on seasonality (slow consumption in upcountry Thailand). Earnings for 3Q15 and 4Q15 are unfavorable due to low seasonality.
What’s changed?
Profits for 1H15 comprise 56% of our full-year forecast (53% of the consensus number). We leave our model unchanged, as 2H15 earnings normally drop HoH (low seasonality).
Recommendation
We maintain a SELL rating on DCC, with a YE15 target price of Bt3.4, based on a DDM framework (a 10.1% discount rate and 2% terminal growth). DCC’s quarterly earnings have seen their peak for the year in 1Q15 (proven QoQ contraction for 2Q15). In 2H15, we assume core profit will rise a moderate YoY but deteriorate around 20% HoH and suggest that investors take profit ahead of DCC’s adverse EPS and DPS outlook for 3Q15-4Q15. Ceramic tile demand in Thailand has shown no signs of recovery yet. The risk-reward for DCC is unattractive at a FY15 EPS contraction of 32% (a 60% share dilution from dividend stocks) and a simple dividend yield of only 2.4% for July-December 2015 (a 4.8% for FY16). Valuations are expensive, as DCC trades at FY15 PER of 18.0x, 1.4x SDs above its FY06-14 mean.
