Dynasty Ceramic

Dynasty Ceramic Plc (DCC) 

 

DCC benefits strongly from the fall in oil prices, as it cuts fuel costs (37% of production cost) as well as transportation costs (50% of SG&A). Despite the halving of oil price since mid-2014, DCC’s share price has inched up just 5% (in line with the SET), which we see as far below the benefits it gains. We like DCC for its 2015 turnaround with growth of 19%, brought by steady margin expansion and clearer demand revival in 2H15. BUY with TP of Bt6.8, implying 11% capital gain and 6% dividend yield.   

Oil price to stay at seven-year low in 2015... Since mid-2014, oil price has plummeted by more than 50% from US$110/bbl to US$54/bbl in response to slowing demand and rising supply. In 2015, SCBS expects oil price to be at a 7-year low of US$60/bbl, a far cry from the US$99/bbl in 2014, most prominently in 1H15, on swollen US stockpiles, annual maintenance shutdowns at regional refineries and labor strikes at US refineries.  

..leading to a wider gross margin and lower SG&A/sales. Lower oil prices are a huge plus for DCC, cutting production costs, where fuel accounts for 37%, and transportation costs, which take up 50% of SG&A. Looking back at 2001-10, DCC’s gross margin ran up to 44% from 24% upon a better ASP brought by more high-priced new products and better ability to control production cost per unit. However, during 2011-14, when oil surged to above US$100/bbl, gross margin fell to 39-43% as cost per unit rose faster than did ASP. The lag effect from the 2H14 fall in oil price means the lower fuel and transportation costs will become more apparent from 1Q15. In 2015, we expect gross margin to expand to 43% (+250bps YoY) thanks to lower fuel costs, and for lower transportation costs to cut SG&A/sales to 18.5% (-30bps YoY).  

Demand to improve gradually. Demand recovery is on course. Though sales volume was still flat YoY in January, it was better than the negative seen for the past two years. We expect more improvement in 2H15 as the government speeds up budget disbursement to meet its targeted 87% in FY2015F (from 19% in 5MFY15), shoring up market sentiment. More stable agricultural prices, notably rubber price late this year, will also help. In 2015, we expect a slight rise in demand (+3% YoY) off a low base from the market slowdown (-5% in 2013-14). 

Better 1Q15F and 2015F. We believe earnings hit bottom in 2014 and estimate 19% YoY growth in 2015 on a better gross margin, lower SG&A/sales and a slight improvement in demand. We expect 1Q15 profit to grow YoY from a better gross margin brought by lower fuel costs and QoQ from seasonally higher sales. 

Maintain BUY. Our end-2015 PT is Bt6.8, based on 19x 2015PE (+1SD over its 5-year PE) equivalent to its 2015 EPS growth. We like DCC for its 2015 turnaround together with its attractive dividend yield of 6-7% p.a. Key risks are changes in sales volume, price competition and gas cost.