Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA)

Investment thesis
Following DELTA’s analyst meeting, we are now more bullish about its 2Q14 core earnings outlook. The decline in data center componentry sales was not nearly as deep as we had previously assumed. We have revised up our 2Q14 core profit estimate by 9% and our FY14 core profit forecast by 1%. As such, our YE14 target price inches up from Bt61 to Bt63.7 (pegged to a core PER of 13x, 1SD above its long-term average). DELTA currently trades at an FY14 core PER of 13.1x, quite stretched in our view, but its dividend yield should support the share price. HOLD!
2Q14 earnings revisited—sales greater than our previous assumption
DELTA will post 2Q14 numbers on July 28. Although data center componentry sales declined during the quarter—two major clients reduced inventories—it wasn’t nearly as severe as we had previously assumed. 2Q14 sales should be reported flat YoY (in dollar terms) and up slightly QoQ. We expect GM of 26.4%, flat YoY but down 64 bps QoQ, due to price erosion for data center componentry. The SG&A/sales ratio should have dropped significantly to 14.8% from 15.4% in 2Q13 and 15.1% in 1Q14 on a lower general administrative expenses/sales ratio. We anticipate a core profit of Bt1,271m—up 9% from our previous estimate—an increase of 14% YoY but down 4% QoQ.
Cautiously positive on 2H14
The third-quarter is normally a high season for sales and the peak period for GM and core profit. But DELTA is subdued about the 3Q14 outlook. The firm saw price erosion for its cloud computing componentry. Price-driven competition for data center componentry sales has intensified with the market entry of copycat products following the expiry of patents. However, DELTA should be able to maintain profitability on administrative cost savings and lower production costs. There is scope for upside to our forecast from a one-off gain tied to the firm’s plan to divest its remaining 45.17% stake in a subsidiary, Delta Greentech SGP Pte Ltd. We roughly estimate the gain at Bt150-180m, to be booked during 2H14.  
Strong growth profile and a generous dividend yield
At the analyst meeting, management talked DELTA’s long-term growth outlook, supported by core competencies—value engineering, a diverse range of clients and products, a professional management team and localization. Increasing sales of products used in the buildout of 4G LTE cellular telecoms networks and rising demand for alternative energy will drive top-line expansion. The operating profit margin target is 13% and will expand in three years. Moreover, the firm doesn’t have a fixed dividend payout policy. It aims to increase its DPS by 20-40 satang per year. As such, we anticipate good dividend yields of 4.8% for FY14 and 5.4% for FY15 against peer means of 4.1% and 4.3%, respectively.