Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA)

Q1 2013F: up 70% YoY backed by data center power supply and India. We expect
DELTA to post 1Q13F net earnings of Bt1.2bn, impressive growth of 70% YoY and 49%
QoQ. Although power supply for data centers (which is DELTA’s biggest business) was
transitioning to a new model, it successfully won a big project to sell the previous
model in 1Q13F. Business in India showed a very positive recovery in early 2013 that
management expects to continue through the rest of this year, with big orders for the
trading business. We forecast 9% YoY earnings growth to Bt9.5bn and strong
improvement in operating margin of 410 basis points YoY to 11%, thanks to economies
of scale plus good control over expenses.
2H13F brightened by several factors. Based on a meeting with management on
Friday, 2013 outlook is bright, especially in 2H13F. Driving growth will be: 1) continuing
strong data center segment thanks to rising demand for cloud computing,
2) improving outlook for businesses in India, both telecom and trading), 3) automotive
segment to take off via products for hybrid cars and 4) control over expenses, which
has been a focus since last year.
2013F raised by 3% to Bt4.8bn (+15% YoY). Despite the recent strength of the baht
against the US$, operating margin trend seems better than we had anticipated based
on new guidance. The company has a goal of slashing SG&A/sales to ~15% in late 2013
from 17.4% in 2012. We are thus cutting our 2013F SG&A/sales assumption to 15.9%
from 16.5%, which raises our 2013F earnings projection slightly (by 3%) to Bt4.8bn, 15%
growth YoY.
Cloud server market looking good for the next three years. Based on HIS iSuppli
Research, the outlook for the cloud server market worldwide is good, underwritten by
the growing use of online storage and infrastructure systems. After the 35% shipment
growth in 2012, a high growth rate of 23-30% is expected for each of the next three
years to shipments of 1.8mn cloud servers unit in 2015F.
Raise TP, maintain Buy with ETR of 21%. After our earnings upgrade, we raise 2013
TP to Bt43 from Bt41 based on 11x PER, which is its ten-year historical average. With
expected total return of ~21%, comprised of 14% share price upside and 6.6% dividend
yield, plus the impressive earnings growth projection for 1Q13F, our Buy rating is
reiterated.