Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA)

2Q13F: Core +45% YoY to Bt1.2bn. 2Q13F core profit is projected to grow 45% YoY to Bt1.2bn, thanks to: 1) continued growth in the cloud computing related segment (power supplies for data centers, networking and servers), 2) recovery in India to reach breakeven and 3) expense control to 15% SG&A/sales (-270 basis points YoY). Adding in an estimated Bt132mn in net extra gains (sale of investment and FX gain) gives a 2Q13F net profit of Bt1.34bn.
Auto biz is taking off. DELTA spent years developing parts, especially switching power supply, for electric vehicles (EVs). This investment will finally begin to pay off as this line takes off in late 2013 with Europe as the major market, according to management. DELTA has a long-term target of 30% sales contribution from the auto segment (from <5% in 2012). According to the Electric Vehicles Initiative, a multi-government policy forum dedicated to accelerating the adoption of EVs worldwide, global EV sales grew 151% YoY to 113K units in 2012. This group projects 20mn passenger car EVs on the road worldwide by 2020.
Strategies support healthy growth and financial status. At a meeting with DELTA management yesterday, they outlined its targets as: 1) raise ROE to 25% from 20%,
2) maintain gross and operating profit at 25-27% and 10-12% respectively, 3) build automotive segment to 30% of total sales, 4) expand geographical coverage (with more focus in Brazil, ASEAN, Australia & New Zealand and the US), 5) always have new business contributing ~20% of sales and 6) maintain ~US$300mn cash on hand.
Raise 2013-14F by 6%. As performance appears better than we had anticipated, we are revising up the following assumptions (2013F/14F): 1) operating margin to 11.5%/11.7% from 10.9%/11.2%, 2) Bt/US$ exchange rates from to 30.5/31 from 29.5/29.5 and 3) sales forecasts +2%/+3%. This raises our 2013-14F core earnings by 6% to Bt5.1bn (Bt4.09/sh) and Bt5.7bn (Bt4.55/share) respectively.
Upgrade TP to Bt56, maintain Buy. DELTA’s 2014F ROE is currently 22%, sizably higher than its five-year average of 17% and the highest in its sector. We believe DELTA stock deserves to be re-rated so we raise valuation to 13x PE from 11x PE, which is the industry’s +0.5 SD ten-year average. This together with the earnings upgrades and the TP rolled to mid-2014 from end-2013, leads us to raise DELTA TP to Bt56 from Bt43. We also expect a 5.6% dividend yield for 2013F, and remain “Buyers”.