Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA)

Investment thesis
The recent pre-results meeting yesterday confirmed our bullishness over DELTA’s FY13 earnings prospects. 3Q13 core profit should beat the consensus estimate of Bt1.2bn (but be in line with our core number of Bt1.6bn). The FY14 outlook is for robust sales growth, rising operating margin and upside enabled by capacity expansion. DELTA trades at an FY14 core PER of 10.2x, in line with its long-term average. We believe the stock deserves a premium, premised on anticipation of a fatter operating margin in FY14 and upside from new capacity. Our BUY rating stands, with a YE14 target price of Bt57, pegged to FY14 core PER of 12x.
3Q13 earnings to post a further QoQ rise
We anticipate 3Q13 net earnings of Bt1.7bn, up 15% QoQ (but down 12% YoY—in 3Q12 a provision was reversed, see below). The top-line should be posted flat YoY and up 16% QoQ to Bt11bn. In YoY terms, higher data center component sales were offset by lower telecom power supply sales. The QoQ rise was due to seasonality and rising data center componentry sales. We expect GM of 29.1%, up 290 bps QoQ but down by 160 bps YoY, as in 3Q12 a US$6m provision for obsolete inventory was reversed and booked against COGS, which skewed up GM to 31%. DELTA should also report an FX gain of about Bt100m for 3Q13.
To invest for capacity expansion in 4Q13
Management guides for modest capacity expansion. The plan has yet to be finalized but DELTA may boost capacity at facilities in India (Rudrapur) and Thailand (Wellgrow 6 in Chachoengsao). The Rudrapur plant makes telecom power systems with an occupancy rate of around 75%. Wellgrow Plant 6 makes automotive-related components and has an occupancy rate of about 80%. The CAPEX for expansion at the two factories is tentatively estimated at US$20m (subject to change). Although the firm is likely to reserve cash for capacity expansion, we believe it can still maintain a dividend yield of 5% for FY13 (a DPS of Bt2.5 against Bt2.4 for FY12).
Remains positive over 2014 outlook
DELTA has a conservative FY14 sales growth target of 5%. But we expect rapid core profit growth for the year of 14.6% YoY, as we anticipate that the SG&A-to-sales ratio will decline further under the firm’s cost control program. We assume FY14 operating margin upside to 13.6% from 13% in FY13. The key products to boost sales growth will be data center componentry, telecom power supplies and automotive components. There is also scope for sales expansion from planned new capacity, which we have yet to factor into our model. The extra capacity would enable DELTA to increase sales by Bt100-200m during FY14-16, which could add 7-13% to our FY14-16 sales assumptions (assuming full capacity runs).