THURSDAY, March 28, 2024
nationthailand

Dynasty Ceramic

Dynasty Ceramic

Demand signs spark rating upgrade BUY

Dynasty Ceramic Plc (DCC)
 
Investment thesis
We said in a previous report that only a sign of recovery in ceramic tile demand in Thailand would trigger a recommendation change. As we are now seeing such positive signs, we have thus upgraded our rating to a TRADING BUY (from SELL), a new YE16 target price of Bt4.6/share (from Bt4.0) to reflect an earnings upgrade (high benefits from the oil price plunge), and apply the DDM model (8.6% discount rate and 1% terminal growth). A short-term catalyst is strong net profit growth in 4Q15-1Q16.
Positive sign of domestic tile demand  
Total sales volume for ceramic tiles in Thailand has seen its trough in Aug 2015 at 12.9m sqm, which was the lowest monthly sales figure since 2010, a decrease of 11% YoY and 5% MoM. In a positive surprise, despite the low season, domestic sales volumes show that such recovery signs will increase 4% MoM to 13.5m sqm in Sep and up 3% MoM to 13.9sqm in Oct. Thus, 4Q15 industry-wide demand is expected to be QoQ flattish, which outperforms the historical evidence of demand slippage by 2-5%. FY15 industry-wide demand should slip 4% YoY to 168m sqm. We are looking for demand growth of 2% for FY16 pegged to CAGR for FY05-14. Demand outlook in Jan-Mar 2016 will expand YoY and QoQ by seasonality and the low base set by the figures from 1Q15. 
Great benefits from oil price downtrend
We have raised our FY16 core profit forecast 2% to reflect the energy price (natural gas) plunge. Natural gas comprises 30% of DCC’s cost of production (its highest single cost) and gas is loosely benchmarked against the price of crude, with quarterly or six-monthly price adjustments (depending on the field). The Brent crude cost has fallen about 24% QTD and 36% YTD to about US$37/bbl. We expect lower gas prices in future, particularly in FY16, which would boost DCC’s GM and profit. We have lifted our GM assumption for FY16 from 42.5% to 43.0%, up 0.5% YoY.
To post 4Q15 bottom-line bounce on deeply low base set YoY 
We anticipate core profit of Bt296m for 4Q15, up 2% YoY and 8% QoQ. However, net profit will jump 58% YoY because DCC has an extra expense of Bt104m on the goodwill write-off in 4Q14 but none for 4Q15. Sales volume for 4Q15 should remain flat YoY and gain a slight 4% QoQ to Bt1.6bn. GM is expected to improve 1.9% 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.
Heading to high seasonal earnings and DPS in 1Q16
Strong earnings growth would resume in 1Q16 led by seasonality. The Jan-Mar quarter is normally the best period of the year for sales and profits—accounting for about 30% of full-year earnings. Sales volume for 1Q15 and profit should both rise QoQ on seasonality and YoY on a better business climate. Assuming a 100% payout rate through cash dividends, we anticipate DPS of Bt0.063 for 1Q16, XD and payment in May 2016.
 
 
 
 
 
 
 
 
 
nationthailand