Dynasty Ceramic

Dynasty Ceramic Plc (DCC)

 

Investment thesis

Above our estimate

DCC posted a net profit of Bt275m for 3Q15, up 1% YoY but down 25% QoQ. The result was 10% below our estimate and disappointed the street’s number by 9%, mainly due to 11% lower-than-expected sales. The company announced a DPS of Bt0.042 for 3Q15 (versus our forecast of Bt0.046), implying a simple yield of 1.1% or a 4.2% annualized yield (XD on November 6; payment on November 20). 

Results highlights

Earnings look flattish YoY because of a sales drop (down 6% YoY to Bt1.6bn due to weak sales volume), but that was amid a fattened GM (up from 40.5% in 3Q14 to 42.3% in 3Q15 because of a 28% YoY lower energy price, which is connected to the shrunken cost of natural gas).  SG&A/sales ratio rose from 19.6% in 3Q14 to 22.1% in 3Q15 due to a lower top line. On a QoQ basis, July-Sept is normally low season. Thus, profit for 2Q15 dropped 25% QoQ due to a 15% plunge in revenue, a 1.0% GM contraction, and 4.2% higher SG&A/sales. Net gearing rose from 0.1x at end-June to 0.3x at end-Sept, as inventory jumped 12% QoQ to Bt1.7bn. 

Outlook

We anticipate DCC to post YoY flattish and moderate growth QoQ for 4Q15 core profit. However, net profit will jump YoY, as DCC has extra expenses of Bt104m on negative goodwill for 4Q14 but none for 4Q15. Sales volume for 4Q15 is unattractive due to low seasonality and slow consumption in upcountry Thailand (70% of DCC’s revenue). GM is expected to improve QoQ due to lower energy costs (gas price). SG&A/sales are well managed. We forecast DPS of Bt0.045 for 4Q15’s operations, XD in March 2016 and payment in April 2016, implying a mere 1.1% simple yield and a 4.5% annualized yield.

What’s changed? 

We have slightly revised down our core profit forecast 1% for FY15-16 to factor in the disappointing 3Q15 result. Our sales assumption is cut 4% to reflect poor sales in 9M15. Profits for 9M15 comprise 77% of our full-year forecast (73% of the consensus number). Our earnings forecast are more conservative than the street’s by 5% for FY15 and 6% for FY16. 

Recommendation

We recommend taking profit from DCC, as the announcement of 3Q15 DPS (push a 5% share price really WoW) is priced in. The risk-reward is unattractive at FY16 earnings growth forecast of 8% and dividend yield of 5.0%, which lagged behind DCC’s good historical yield range of 5.5-6.0%. Valuations are expensive at FY16 PER of 18.2x, near 2.0x SDs above its FY06-14 mean. We rolled valuations to a YE16 target price of Bt4.0, based on a DDM framework, a 10.2% discount rate, but a terminal growth rate cut from 2.0% to 1.0%. Only recovery signs in ceramic tile demand in Thailand will trigger a recommendation change.