Thai Stanley Electric

2Q15 profit was 13% below our estimate

STANLY posted 2Q15 (July-Sept 2014) earnings of Bt235m, down 35% YoY but up 15% QoQ. The number was 13% below our estimate and 38% short of the Bloomberg consensus. The bottom-line disappointment was due to a slimmer gross margin than modeled. For the quarter, STANLY’s GM fell to 15.3% from 17.6% in 1Q15 and 20.3% in 2Q14 (we had expected 16%). Thus, 2Q15 earnings represent only 32% of our old FY15 projection.

Results highlights

Revenue rose 17% QoQ to Bt2.4bn, due largely to new orders (in tandem with greater QoQ auto production during the quarter). But the top-line was still down 8% YoY. Note that July-Sept vehicle output was 456k units, down 22.5% YoY but up 4.8% QoQ.

STANLY’s newest (seventh) production line’s run rate remained below 70%. The failure to build economies-of-scale at the seventh line was largely responsible for the GM slump. The firm expects it to approach 70% by late 4Q15 (January-March 2015). 

Outlook

We anticipate that the firm will deliver slim QoQ core earnings growth for 3Q15 (Oct-Dec). Weak GM in the face of heavy OPEX tied to the new production line will continue to dampen the bottom-line. 

What’s changed?

Because of the slow pace of the recovery and poor 1H15 April-Sept) GM, we have cut our GM assumptions from 22% to 18% for FY15 and from 21.5% to 19% for FY16. Our lower GM assumptions mean that our bottom-line forecasts fall by 15% to Bt1.15bn for FY15 and by 9% to Bt1.36bn for FY16.

Recommendation

The weak 1H15 earnings performance and the anemic recovery outlook for the Automotive sector make us bearish about STANLY’s prospects. Besides, the stock trades at an expensive PER of 14.7x (based on our new forecast) compared with its last peak of 13.75x (up 1SD) in 2012. We have downgraded our STANLY rating from BUY to SELL. Within Automotive space, we prefer SAT for its lower PER of 9x and scope for earnings upside from new production for Kubota and Hino in 4Q14 onward.