Dynasty Ceramic

Dynasty Ceramic Plc (DCC)

DCC expects to gain from the fall in oil prices in the near term in the form of lower natural gas cost (30% of production cost) and transportation cost (50% of SG&A). Demand remains flat YoY with more improvement in 2H15. DCC targets 2015 sales growth of 5-9% YoY, with higher volume (+4%) and price from better product mix. It targets gross margin to pick up to 43% in 2015 from 40.5% in 2014, mainly from lower costs. Our 2015 forecast lines up with its target. We like DCC for its better 1Q15F earnings, 19% earnings growth in 2015, and 6% dividend yield. Maintain BUY with a PT of Bt6.8.  

 

Margin expansion starting in 1H15 with clear demand revival in 2H15. In Jan 2015, DCC’s sales improved 2% YoY from better product selling price, with sales volume stable. DCC has raised the proportion of its high-priced new products, i.e. rectified and hybrid ceramic tiles, further from 16% of sales in 4Q14. It expects a clearer improvement in the economy in 2H15 to bring a clearer revival in domestic demand. DCC is also positive on the cost side. In Jan 2015, it saw a drop in natural gas cost (30% of its production cost) of 15% YoY. With a six-month lag in natural gas price changes vs. crude oil price, DCC expects to see a greater fall in natural gas cost in 1H15. Transportation cost (50% of SG&A) is falling 20-30% YoY thanks to lower diesel cost. 

 

2015 targets. DCC targets 2015 revenue growth of 5-9% YoY. This will be underwritten by sales volume growth of 4% (vs. -5% in 2014) and higher product selling price from a better product mix. It expects a better gross margin of 43% in 2015 from 40.5% in 2014, largely from lower natural gas cost but also partly from better product pricing. SG&A expenses should be under control in the presence of lower transportation cost. 

 

2015 capex. 2015 capex is set at Bt400mn and will be used to add five outlets to the 195 stores at end-2014, as well as fund store re-branding via renovation and land acquisition for new outlets. For store re-branding, DCC will renovate the outside of 30 stores and inside of 40 stores in 2015. After the completion of store renovation, it has observed an increase in sales at its more modernized stores of ~20%. This will be another factor supporting sales.  

 

Better 1Q15F earnings. We expect profit to improve YoY and QoQ: YoY from a better gross margin thanks to lower fuel costs and QoQ from seasonally better sales volume.  

 

Maintain BUY. Our 2015 forecast is relatively the same as the company’s target. We believe earnings touched bottom in 2014 and estimate 19% YoY growth in 2015, with a better margin (+250bps YoY) from lower fuel costs and a slight improvement in demand (+3% YoY) off a low base from last year’s market slowdown. With better earnings growth and high dividend yield of 6% in 2015F, we maintain our BUY with unchanged end-2015 PT of Bt6.8, based on 19x 2015PE (equivalent to +1SD over its 5-year PE). Key risks are changes in sales volume, price competition and gas cost.