Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA)

Investment thesis
The recent analyst meeting has renewed our optimism in the outlook for DELTA’s share price performance—concerns over weak 1Q13 earnings have ebbed (due to a windfall from a data center componentry order during the quarter), the scope for 2H13 profit expansion is exciting and a consensus forecast upgrade is underway. We have upped our forecasts by 12% for FY13 and by 16% for FY14. Despite its recent 8% share price bounce, DELTA remains cheap—an FY13 PER of only 10.3x, against a Thai Electronics peer mean of 12.1x. As such, we have upgraded our rating from SELL to BUY.
Q1 2013 earnings should beat street expectation …
DELTA has turned bullish over 1Q13 profitability, citing unexpected orders related to data center components (old model) for the quarter that boosted both sales and GM. Furthermore, the trading business in India has expanded strongly, led by sales of display products (video walls and projectors), pushing up GM. DELTA’s cost-cutting program also continues to bear fruit—a significant YoY drop in the SG&A/sales ratio. We now estimate a 1Q13 earnings surge of 64% YoY and 44% QoQ to Bt1.2bn, 35% greater than our previous estimate (Bt870m) and the consensus (Bt800m).
…but 2Q13 bottom-line likely to drop QoQ from high 1Q13 base
We anticipate that 2Q13 profit will fall 15% QoQ,, due to the high base effect and baht appreciation. Due to DELTA’s conservative accounting policy, a significantly stronger baht would result in a costing run (a recalculation of the price of finished products, work in process and raw material prices in baht terms) which would squeeze GM. However, on a YoY basis, 2Q13 earnings should increase 10%, driven by a shallower loss at the solar component production line and a bigger profit contribution by the trading business in India.
Q3 2013 should peak; 2H13>1H13
Management reaffirms that data center-, automotive- and solar-related components will drive the top-line in 2H13. Our modeling strongly indicates that 2H13 earnings will expand by 11% HoH. That said, 2Q13 will be the nadir, followed by a jump in 3Q13. We anticipate that sales volume will jump on a combination of high season and the launch of new data center-related products. GM will rise strongly to 26% in 3Q13, driven by a sales mix shift toward fat-margin products. Moreover, the SG&A-to-sales ratio should fall further on lower research and development expenses and higher sales. 4Q13 earnings may soften 6% QoQ on seasonality.