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Dynasty Ceramic (DCC TB) Summary

Core Content

Dynasty Ceramic (DCC TB) is a Thai ceramic tile producer with a market capitalization of USD 651M and a share price of THB51.5. The company is currently rated as a BUY with a target price of THB68.00, implying a potential upside of 32%. The analysis highlights DCC's strong performance in terms of returns, particularly its ROAE and ROCE/WACC, which are expected to remain solid during 2014-2016.

Main Points

• Dividend Attraction: DCC is a strong dividend payer, with a projected average dividend yield of 8% over the next three years, significantly higher than the market's average of 5%. The company pays out 100% of its earnings as dividends, making it a dividend story.

• Growth Expectations: Despite weak consumption in 1Q14, DCC is expected to deliver 7% YoY revenue growth in 2014, driven by a 3% volume increase and margin improvement. The long-term sales growth is projected at 8.3%, which is relatively conservative compared to pre-flood years (2008-2011).

• Operational Efficiency: DCC has a high utilization rate, which contributes to its profitability and lower earnings volatility. The company is working on cost savings through process improvements, kiln upgrades, and merging subsidiaries to streamline operations.

• Market Position: DCC is the second-largest ceramic tile producer in Thailand, with 20 operational kilns and a potential annual capacity of 79mn sqm by 2016. It is a family-run business with a strong franchise and distribution network covering 196 outlets nationwide.

• Valuation: DCC is currently undervalued, trading at a core P/E of 14.3x for 2014 and P/BV of 7.4x. Its net dividend yield is expected to rise to 9.2% by 2016, and its FCF yield is projected to increase from 3.6% in FY12 to 9.0% in FY16.

• Acquisition Potential: DCC is viewed as an attractive acquisition target, especially for building products companies looking to expand in the ASEAN market. Its land assets and operational efficiency make it a valuable asset.

• Catalysts: The introduction of larger-sized tiles and digital printing technology is expected to improve margins and sales. A mild El Nino phenomenon could lead to a drier monsoon season, potentially boosting construction activity.

Key Information

• Share Price Performance: The share price has shown positive momentum, with a 1Mth return of 6.2% and 3Mth return of 2.0%, though it has had a negative 12Mth return of -16.3%.

• Dividend Yield: The prospective dividend yield is expected to average 8%, with 2014 yield at 7%.

• Earnings: DCC reported THB1.3bn net profit in 2013, up 3% YoY, but volume sales dropped 5%. Earnings estimates have bottomed, with 2014 PATMI at THB1,468m.

• ROE and ROCE: DCC has consistently high ROE, with 53.1% in 2014E and 61.0% in 2015E, and ROCE/WACC expected to range from 4.6x to 5.7x.

• Capital Structure: DCC has a net debt/equity ratio of 23.7% in FY12 and 35.2% in FY16. The company has a strong balance sheet with high cash flow from operations and free cash flow expected to rise to THB1,901.1m in FY16.

Financial Highlights

Risk Factors

• Import Competition: Imports from China (low end) and Europe (high end) could disrupt the market, though the share of imported tiles to total is estimated to be around 8%.

• Weather Conditions: Bad weather could negatively impact farming activity, which in turn could affect construction demand.

• Cost Increases: A COGS escalation above 15% could impact margin assumptions.

Conclusion

DCC is seen as a high-yielding, attractively valued stock with a strong dividend track record and resilient returns. Despite the slowdown in consumption, the company is expected to maintain its market leadership through operational improvements and dividend sustainability. The BUY rating is maintained based on DDM-based valuation and positive outlook for the remainder of the year.