Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA)

Investment thesis: We attended DELTA’s analyst meeting yesterday. Management guided for good 2Q12 earnings, fueled by the release of pent-up demand from 1Q12. However, we are more cautious on 2H12 outlook, due to EU financial crisis. We have trimmed our full-year top-line and profit forecasts by 2% and 3%, respectively. Our new YE12 target price is Bt26.20 down from Bt26.50. We believe that the staff redundancy program will enable strong FY13 bottom-line growth. The stock trades at an FY12 PER of 9.2x and EV/EBITDA of 4.5x, lower than its respective long-term means of 9.7x and 5x. BUY!

2Q12-QoQ bounce: We estimate 2Q12 revenue expansion of 22% QoQ and 7% YoY, driven by the release of pent-up demand among customers that slashed orders to DELTA because of component shortages in 1Q12. Solar inverter sales during the quarter rose and the firm won’t set an extra provision for obsolete inventory. As such, GM should expand by 150 bps YoY to 25.8%. However, we expect the bottom-line to soften 6% YoY because in 2Q11 DELTA booked a Bt44m tax credit.

2H12 numbers trimmed-but HoH growth intact: Management reduced its full-year sales guidance to at least US$1,200m from its previous target of $1,300-1,400m, due to the weak EU economy, which may discourage corporate investment, squeezing the firm’s component sales. However, we believe the guidance is too conservative, as the third-quarter is normally high season. According to MS’s US electronic analysts, the second-half sales profiles of DELTA’s key clients are healthy; most will report modest earnings growth.

Redundancy program a long-term plus: Although the 2H12 outlook is now more subdued, we remain bullish on FY13, led by profitability improvements brought about by lower SG&A expenses. Over the long-term, the firm aims to reduce its SG&A/sales ratio to 15% from its historical range of 17-18% through a staff redundancy program. So SG&A will surge in 4Q12 with redundancy payouts, then drop sharply in FY13. Our sensitivity analysis suggests that every 1% fall in the ratio would boost earnings by 11%.