Delta Electronics (Thailand)

Price Target : Bt19.00;

3Q11 earnings fell 54% YoY and 18% QoQ to Bt752m (EPS Bt0.60) due to weaker margins

Weak earnings outlook with higher material costs and rising wages

Maintain HOLD and Bt19 TP, offers 7.3% dividend yield (FY11F)

Comment on Results

3Q11 profit of Bt752m, 5% above expectation. Sales in US dollars grew 7% YoY, driven by telecom power systems (in Europe and South America) and power supplies for IT products. However, gross margin narrowed to 23.3% from 28.8% in 3Q10, following an 80% drop in sales of solar inverters, Bt20m provision for obsolete inventory, and a stronger baht. SGA/sales rose to 17% from 15.6% in 3Q10 mainly due to higher R&D and marketing expenses. 9M11 earnings account for 81% of our full year forecast.

Balance sheet remained strong, with Bt7.2bn net cash (Bt5.8/sh) at end-3Q11.

Expect weak operations over next six months. We expect 4Q11 sales to drop 20% QoQ due to the global economic slowdown, especially in Europe and the US. DELTA’s earnings should also be pressured by higher material costs and rising wages. And it has had to source more materials from overseas because widespread flooding in Thailand has disrupted its domestic supply chain. We note that industrial estates where DELTA’s plants are located have been spared from floods.

Recommendation

Maintain HOLD. Our Bt19 target price is pegged to 8x FY12F PE. DELTA’s weak earnings visibility and unresolved flood situation in Thailand could cap share price in the near term.