Thai Stanley Electric

Thai Stanley Electric Plc (STANLY)

1Q14 profit was 16% below our estimate

STANLY posted 1Q14 (April-June 2013) earnings of Bt392m, up 19% YoY but down 19% QoQ. The number was 16% below our estimate and 21% short of the Bloomberg consensus, due to a slimmer GM than modeled of 21.5% (we had expected 24%). The slim gross margin was attributable to capacity expansion and slower auto production during the quarter than we had assumed. 1Q14 profit represents 19.6% of our FY14 projection.

Results highlights
Revenue increased 11% YoY (but dipped 5% QoQ) to Bt2.8bn, due largely to the low base set by the post-flooding period in 2Q12 (Honda resumed operating at the end of March 2012, but it took some months for its output to ramp up). As STANLY’s major clients—Toyota, Honda, Mitsubishi and Nissan—take delivery of parts some weeks ahead of producing vehicles, there wasn’t much positive impact for suppliers from the delivery of vehicles ahead of the June 30 deadline for the first-time car buyer scheme. Note also that there was a run of public holidays during April, hence the QoQ drop in sales for the April-June quarter.
The firm’s newest (seventh) production line’s run rate rose to 75-80% from 50-60% during 4Q13. Management expects it to approach 100% by March 2014. Note that 1Q14 gross margin slipped to 21.5% from 24.4% the previous quarter and 22.3% in 1Q13 because of the low utilization rate at the seventh line.   
Outlook
We anticipate that the firm will deliver QoQ earnings growth for 2Q14 (July 2013-Sept 2013), when there will be far fewer public holidays.
What’s changed?
Our FY14 earnings forecast stands unchanged at Bt2bn. We model for a net margin of 17.5% for the year, as we expect the seventh line’s run rate to rise in the months ahead.
Recommendation
Although the July-December outlook for automotive production is subdued, given slowing consumption growth and the absence of the first-time car buyer scheme, we are positive about STANLY’s prospects—rising capacity utilization and new orders from Toyota and Honda for newly-launched models. Our BUY rating stands.