Thai Stanley Electric

Thai Stanley Electric Plc (STANLY)

We initiate coverage of Thai Stanley Electric (STANLY TB) with an Outperform rating and a target price of Bt257, implying 20% upside potential. STANLY trades on less than 10x forward PER despite potential double-digit earnings growth over the next three years, strong market position, and net cash balance sheet. The stock is our top pick in the sector.
Dominating Thailand’s automotive lighting
STANLY dominates Thailand’s automotive lighting market, commanding over 50% of the lighting components market for 4Ws and 90% of that for 2Ws. The company is involved in all product segments, including fast-growing eco cars, and has a well-diversified list of customers. As we benchmark STANLY’s performance against its rival Thai Koito (not listed), we believe the company can maintain its superior margins, given its locally integrated manufacturing model, which is one of its key competitive advantages. 
Riding the boom
Given STANLY’s broad-based exposure and strong market position, we believe the company will benefit from the growth in Thailand’s auto output, which we expect will reach 3m units by 2015 from 2.3m this year. The company receives orders from all the eco car models, which we think will support an above-industry growth rate over the next 3 years. Management is also engaging with automakers seeing the strongest production growth (Mitsubishi, Nissan). This should help ensure order visibility over the next three years. With its dominant position in the 2W market, STANLY will also enjoy growth in Thailand’s motorcycle production over the same period. This would be driven by both exports of scooters to neighbouring countries including Myanmar as well as relocation of big bike production to Thailand by Japanese and European OEMs. 
Double-digit earnings CAGR in FY 3/2013-16E
While we are below consensus on earnings, we still expect STANLY to enjoy 13% earnings CAGR over the next three years, driven by both volume growth and margin expansion. We expect its fixed costs relative to sales to come down as production for eco cars ramps up at the company’s new plant. 
Attractive value, limited downside risk
Over the next 12 months, we believe STANLY deserves to trade at a higher PER multiple than its historical average of 10.4x and set our target PER at 11x. We believe the stock is well supported at our target multiple, given strong earnings growth as well as significant increases in FCF, which offers upside risks to our dividend forecasts. While global demand posts the biggest downside risks, we believe STANLY is well protected, given visibility in Thailand’s 4W production over the next 3 years as well as the company’s conservative financial management.