This thematic paper aims to estimate the share price of Diamond Building Products Public Company Limited (DRT) based on the discounted cash flow valuation method, which has the concept that the firm's share price should reflect its fundamental value in terms of cash flow, growth. and risk. Result at the end of 2016, DRT's target price will be approximately equal to 5.69 baht per share while the current price is set at 5.15 baht per share; therefore, the rating is indicative of BUY.
LIST OF ABBREVIATIONS
VALUATION
Highlights
- Economic fundamental and valuation are indicative to BUY Economic gradually return result positive signal for DRT as a cyclical
- Rising export channels is DRT driver from domestic volatility Strong demand for construction material from neighboring countries in-
- Sustainable business model with attractive dividend yield
- Stock repurchase signal stock undervalue
The use of cash from the share buyback announcement will lead to higher earnings per share and a higher dividend per share. Providing a signal that shares are undervalued could stimulate demand for DRT stock incentive shares, according to the law of supply and demand.
Business Description
- Strategy
- Management and Corporate Governance
Strong and long-standing relationship with distributors nationwide is an important key to DRT's competitive advantage. The rating led by the Thai Institute of Directors (IOD) and the Stock Exchange of Thailand is followed by.
Macro-economic Analysis
- Good signal for economic recovering
- Improve in agricultural price and Approved measure to support farmers
- Restructuring on china to prosperous society
- Best-Performing Emerging Market
- AEC brighten future for ASEAN Economies
- Remains Bear market for Crude Oil
- Baht depreciation will boost up export
By 2025, there will be 69 cities with more than one million inhabitants, they will be the destination for the concentrated economy with the construction of infrastructure, more residential areas, reliable services, etc. collect more than 660 million in 2020 and more than 720 million by 2030.
Industry Analysis
- Government Stimulation Incentive Demand for Construction Material
- Renovation and Green Building Trend
- Aggressive Competition on Modern Trade Bustle the Market Various marketing campaigns from modern trade stores were launch out to
- More rain than expected, prompted home renovation
54 percent increase in green building units per year from 6 buildings in 2007 to 294 in 2016 due to benefits of energy saving and quality of life. Store expansion is another key growth strategy of the modern trade stores which are expected to have around 140 branches nationwide in 2016. More rain than expected, about 72 percent higher than 2015 resulted in 14 provinces such as Ayuthaya, Chinat, Nakorn Sawan, etc.
Home reconstruction will begin immediately after the floods end, which will contribute to greater demand for home building materials.
Competition Positioning
- TPI Polene rival into the market
- Competitive rivalry poses high impact on DRT
However, in the modern trade, the Mahaphant group (Ha-Huang brand) is the channel of premium products such as tile – metallic colors which offer the unique color product at high price, but in terms of board/wall application in the name of Shera . brand, the price is in the middle range and higher than Diamond Building Products (DRT). However, based on market research, Diamond Construction Products (DRT) are the most popular among consumers through modern trade. Within the same mid-sized building materials peers, Diamond Building Product (DRT) has faced similar difficulties in generating revenue growth amid weak consumer demand, but has benefited from low energy costs from efficiency of cost and the lowest price of oil in the market.
Diamond Building Product (DRT) and also the Mahaphant group (Ha-Huang brand) offer a wider range of products. Diamond Building Product (DRT) is aware of the low price strategy; therefore Diamond Building Product (DRT) defends its market with the expansion of new product lines such as grooved siding, ventilation board and fence, along with the strategy to increase for non-asbestos. Our Porter Five Force analysis implies an intensely competitive and unfavorable market environment.
Despite DRT facing fierce competition in the market from existing competitive rivalry and new competitors, it increases the larger supply in the market.
Investment Summary
- Deliberate growth for 2016 but brighten future
- Agent’s sales through channel will remain for main revenue plus addition strong growth from export and modern trade channels for DRT’s sales
- Cost per unit reduction and continuous improving on production process increase the margin
- Strong distribution network and hub’s warehouse in key regions allow the fast distribution and reach through customers
- A trusted brand among consumer’s perception
- High profitability and dividend yield
The strong strategic growth plan by DRT's management team has continuously diversified its supply chain through export channel especially CLMV countries with targeting 20% and accordingly via modern trade channel up to 15% growth. With push and pull marketing strategies, modern commerce will also support growth for this channel. In addition, the management saw the potential growth via sideboard segment from 2016 performance, this will increase the revenue for DRT because sideboard has good profit margin.
In addition, DRT has set a strategic plan for superior sales through synthetic wood products (floors and walls) and excellent service. In addition, DRT has continuously reduced its operational costs through cost reduction projects and improving the efficiency of existing operations through the participation and initiatives of all employees. DRT has a long-standing reputation in the construction market, long-term cooperation through agents in more than 6000 stores, which is one of DRT's competitive advantages and part of DRT's continued success, rapid production capacity and efficiency, and expansion of investment in distribution. hub in a key region, Khonkaen, this will support growth in demand and improved reach through consumers.
DRT's dividend yield is in the top three of its sector at 5.47 percent, while the industry average is around 3 percent.
Discounted Cash Flow Valuation
- Three-Years Projected Cash Flow Assumptions
- Strong and maintain margin
- Reduction on SG&A expenses
- Terminal Value Component Assumption
- CAPEX
- Weighted Average Cost of Capital
Together with the positive signal from the lower price of the main raw materials, this will increase DRT's future profit margin. PSA costs are reduced due to lower claims for goods costs and as an advantage due to lower oil prices result in lower logistics costs. However, we expect PSA costs to remain stable at a similar level compared to sales as represented by the historical trend.
Therefore, we use a constant growth rate of 1.77 percent, derived from the average CAGR of the number of households from frequently flooded areas in Thailand, where the sample provinces will have a flood frequency of at least three times in ten years. So, if there is no construction expansion in the future, DRT will still be able to gain sales from the renovation sectors. The projected CAPEX will be kept low as the total production capacity of 982,000 tons will still be able to cover the market demand.
Then the cost of equity is 9.56 percent, while the average cost of debt is 3.30 percent and the tax rate is 20 percent.
Financial Statement Analysis
- Strong cost efficiency, maintains high profit margin
- Economic recovery signal positive growth on sale
- Net Profit Remains Stable
- Balance Sheet and Financing
- Well Balancing of Capital Structure
- Cash Flow: High efficiency of operation
- Common Size Analysis
The financing structure of DRT will be based mainly on short-term debt in the amount of 85 percent and long-term debt around 15 percent. DRT has a low D/E ratio, indicating that the company has relatively little debt and equity financing. When we studied the same business in the construction industry, we found that DRT has a lower D/E ratio when comparing SET and Building Materials, so DRT is considered a less risky business in terms of leverage.
DRT maintains a level of cash and cash equivalents deemed sufficient by management to fund operations. The selected comparison companies are DCC, Q-Con and TGCI, which are these companies in the same industry with similar size and business operation structure of DRT. For inventory it is still almost an average with the industry as DRT has good policy on inventory management.
DRT's short-term and long-term debt ratio is similar to others that rely more on short-term credit than long-term credit.
Additional Upside Possibilities
- Rising capital inflow to Thai market
- Share repurchasing increase per share outstanding value
DRT decided on the share buyback program in June 2016, approximately 100 million shares or about 9.5% were bought back as management believed that the current share price was undervalued, this will increase the value of each outstanding share, for example, higher earnings high per share and dividend per share.
Investment Risks
- Macro-economic risks
- Industry risks
- Operation risks
- Scenario Analysis
- Sensitivity Analysis
Therefore, keeping the share price of the other DRT factor constant will be equal to THB 9.47 per share. Furthermore, due to the struggling economy, many constructions were delayed and looking back at last year the growth rate has been declining in recent years, so for a terminal growth rate of 0 percent, this is possible to happen. The sensitivity analysis assumes the sensitivity of two variables which are the weighted average cost of capital and the terminal growth rate.
The result shows that the stock price has a positive relationship with the terminal growth rate, which if the terminal growth rate increases, the stock price will tend to increase. On the other hand, for WACC, it represents a negative relationship with share price, where if WACC increases, share price will decrease. At the current point, with a WACC of about 8.30 percent and trailing growth at 1.77 percent DRT, the share price is equal to THB 5.69 per share.
However, if the WACC falls to 5.81 percent with a terminal growth rate of 3.78 percent, DRT share price will rise to 26.6 THB per share.
DATA
- DRT Business Structure
- SWOT Analysis
- Five-force Analysis
- Assumptions
- Terminal Growth Rate Assumptions
- Weighted Average Cost of Capital
- Beta
- WACC
- Appendix
DRT has invested in many areas such as own distribution center (DC) located in KhonKean with a capacity of 40,000 tons/year, has an autoclaved aerated concrete (AAC) plant in Chiangmai with a capacity of 50,000 tons/year acquired and launched a new production. line of autoclaved aerated concrete (AAC). Strong relationship with distributors: DRT marketed its products through traditional dealers (mom and pop stores). Due to the slow demands in the market which resulted from sluggish economic growth, it causes DRT to have its production capacity around 72% and is not satisfied to utilize and maximize its assets and warehouses.
DRT has been facing lower revenues in the past year due to low market demand and high competition among vendors to capture the existing through intensive promotional and pricing campaigns. Due to the slowdown in the economy and the low impact on agricultural prices, this was reflected in sluggish demand in building construction. They take into account the low price of products that are very competitive in the building construction market.
As mentioned, people are more careful when purchasing and more sensitive to prices on the construction market, which has a major impact on DRT. DRT has been active in the construction sector for a long time and has maintained good relationships with it. The supplier has moderate negotiating positions because DRT has high negotiating power due to its large volume purchasing within the top 3 in building materials construction.
