Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA)
 

Slightly above our estimate: DELTA posted a solid profit of Bt713m, up by 12% QoQ and 28% YoY. The result beat our estimate by 4% and the street by 7%. The firm reported strong sales, surprisingly good GM and interest income that was higher than we expected. 
Results highlights: 1Q12 sales slipped by 4% YoY and 6% QoQ to Bt8.7bn, due to shortages of electronic components critical for production among some clients. As a result, those customers cut back orders to DELTA. Gross margin was 25.7%, up by 332 bps YoY. The impressive GM was due in large part to the fact that no extra provision was set against obsolete inventory (the firm set a huge provision last year against obsolete solar inverter inventory, which dragged down its FY11 GM by around 3.2%).
Outlook: We expect DELTA’s performance to improve further both YoY and QoQ in 2Q12, driven by increasing sales volume—management guides for strong top-line expansion—and a fatter YoY gross margin, as it won’t set any heavy provisions for obsolete inventory.
What’s changed? 1Q12 earnings represent 20.3% of our full-year forecast and the consensus. We maintain our FY12 projection and YE12 target price unchanged.
Recommendation: Our BUY rating stands, based on: 1) a strong outlook for technology-related products 2) a sustainable gross margin outlook and 3) the best dividend yield in the sector (with scope for upside to the payout).
DELTA currently trades at a FY11 EV/EBITDA ratio of 4.1x, lower than its long-term average of 4.5x. However, we believe that its GM outlook and the imminent start of high season justify a valuation that exceeds the stock’s long-term mean. Historical data indicate that DELTA could possibly trade at 2SDs above its long-term average during export high season. BUY!