Delta Electronics (Thailand)

Results highlights: The top-line rose by 4% YoY and 19% QoQ. The firm cited that solar inverter sales expanded by an impressive 167% YoY, due to increasing demand and the low base set by 2Q11. GM came to 24.8%, up 50 bps YoY (in 2Q11, DELTA set a provision against obsolete inventory). The SG&A/sales ratio was 15.4%, down 140 bps YoY and much lower than our assumption of 17.8%, due to lower-than-expected selling expenses.
Other expenses jumped YoY because DELTA restructured its solar inverter business—it booked restructuring expenses of Bt182m for 2Q12. Moreover, the firm paid tax in the second-quarter of 2012; in contrast, 2Q11 it booked a tax credit in 2Q11. The increased expenses outweighed the effect of higher interest income and an FX gain. As such, net profit was squeezed by 1% YoY.
Outlook: We anticipate that 3Q12 net earnings will rise further, both YoY and QoQ. Top-line expansion, a fatter GM YoY and slimmer SG&A should outweigh the impact of increasing “other expenses” related to the employee redundancy program, which will continue in 2H12.
What’s changed? We have revised up our FY12 earnings forecast by 3% and our YE12 target price by 1% (to Bt26.50) to reflect greater-than-expected interest income and FX gains. 1H12 earnings represent 50% of our full-year forecast and the consensus.
Recommendation: DELTA deserves to trade at multiples that exceed its long-term averages, due to increasing sales, GM expansion and scope for a further SG&A/sales ratio decline. Our target price is pegged to an EV/EBITDA ratio of 5.4x (0.4SD above its long-term average). Our BUY rating stands.