Delta Electronics (Thailand)

Delta Electronics Plc (Thailand) (DELTA)

Investment thesis
We attended DELTA’s pre-results analyst meeting yesterday and remain optimistic about the prospects for share price upside. 2Q13 core earnings should beat our previous estimate and the scope for 2H13 profit expansion is exciting. We have upped our forecasts by 16% for FY13 and by 15% for FY14. Our new YE13 target price is Bt54 up from Bt42.5, pegged to a core PER of 13x, 1SD above DELTA’s long-term average core PER of 10x. The stock trades at an FY13 PER of 11.7x, lower than the mean core PER of our Electronics coverage of 14x. Our BUY rating stands.
2Q13 earnings should beat street expectation
We now anticipate 2Q13 core earnings of Bt1.3bn (up 11% from our previous estimate of Bt1.2bn), up 46% YoY (but down 6% QoQ from the high base set by 1Q13). The expected solid YoY core earnings growth was driven by both the top-line and GM expansion. Management is now more bullish on the 2Q13 profit outlook, as the firm received orders for components related to data centers during the quarter. We expect GM of 27%, flat QoQ but up 220 bps YoY on a better sales mix. The firm should also report an extra gain of around Bt100m as a result of downsizing its stake in DELTA Greentech SGP to 20% from 54.8%, previously. As such, we model for a net profit of Bt1.3bn, up 46% YoY and 8% QoQ.
FY13-14 earnings forecast upgrades
DELTA maintains its FY13 sales growth target unchanged for the moment, but suggests that it might announce a new target within a month or so. We regard the current guidance as too conservative. Posted 1H13 sales are likely to comprise 47-49% of its annual target (generally the first-half of the year comprises ~45% of the full-year target) and the third-quarter is high season. Furthermore, new data center-related component products should be launched in 3Q13 and DELTA also has a project related to automotive components in-hand, which will generate revenue in 2H13 and FY14. As such, we have revised up our core earnings forecasts by 16% to Bt5.3bn for FY13 and 15% to Bt5.7bn for FY14. 
Profitability on a long-term uptrend
We expect net margin to rise from 10.7% in FY12 to 13% in FY15, led by sales growth, a fatter GM and better cost control.  As old projects continue to generate revenue and new projects are about to bear fruit, we believe that the firm’s long-term annual sales growth target of 5-10% is achievable. Moreover, the profitability of new projects (solar, telecoms infrastructure power supplies and automotive-related componentry) should improve on margin expansion, brought about by sales mix adjustments and cost reduction efforts. As no huge investments are budgeted for FY13-15, we are confident that DELTA could achieve its FY15 ROE target of 25% by raising its dividend payout ratio to 100%.