Thai Stanley Electric

Investment thesis

We attended STANLY’s analyst meeting yesterday, which was hosted by Mr Apichart Lee-issaranukul, the CEO of STANLY. He expressed bearishness over the automotive industry’s outlook for domestic sales and exports for the remainder of this year and early calendar year 2015. His views are consistent with our assumptions. We, thus, maintain our STANLY earnings forecasts at Bt1.15bn (down 22% YoY) for FY15 (April 2014-March 2015) and Bt1.36bn (up 18%) for FY16. Although the firm is receiving orders for new models from Nissan, Honda and Toyota, prevailing low demand for new car sales presents a major dampener on profitability. Our SELL rating stands.

FY15 sales forecast cut to an 8% decline from 0-5% growth

Management guides that FY15 (April 2014-March 2015) sales will decline slightly YoY, due to the poor environment for domestic car sales and slow exports. STANLY has won new orders from big carmakers—from Nissan for its Navara (pick-up trucks) and from Honda for tis Mobilio and Filano models. However, the October-December outlook for domestic sales is bad. We would want to see clear evidence of improving demand before we would think of adjusting our forecasts. Our FY15 sales assumption is Bt9.4bn, down 8% YoY.

Capacity utilization rate will remain below 70%

Stripping out the new factory, Lamp#7, STANLY’s other six plants are operating at a mean utilization rate of about 70%. Lamp#7’s run rate was below 50% in 1H15, due to low order volume for new car models. Mr Apichart guides that the new factory’s utilization rate will remain about 50% through this financial year (April 2014-March 2015). Given the poor 2H15 outlook, we maintain our GM assumptions at 18% for FY15 and 19% for FY16. There is downside risk to our GM assumptions—industry-wide automotive production might be lower than expected.

Lower CAPEX and debt-free

The firm maintains an FY15 CAPEX budget of only Bt1bn (lower than its previous number of Bt1.4bn) to modify existing production lines to cater to demand shifts among major clients—Honda, Nissan, Yamaha and Toyota. The investment will be financed entirely by internal cash flows, according to STANLY. Note that at end-September 2014, the firm had cash on-hand of Bt2.4bn and was debt-free.

Extra gains from asset sales in 2H15

Mr Apichart said the firm will book extra gains of Bt100m in 3Q15 from factory sales in Navanakorn Industrial Estate and gains of several hundred million baht in 4Q15 on the divestment of equities. As such, its FY15 profit will be supported somewhat, despite weak operations. We have already assumed this in our model. We forecast other income of Bt220m in FY15 down from Bt310m (tied mostly to insurance payouts) last year.