Thai Stanley Electric

Thai Stanley Electric Plc (STANLY)
2Q14 profit was 16% below our estimate and consensus
STANLY posted 2Q14 (July-Sept 2013) earnings of Bt359m, down by 2% YoY and 8% QoQ. The number was 16% below our estimate and the Bloomberg consensus, due to a slimmer GM than modeled of 20.3% (we had expected 22%). The slim GM was attributable to capacity expansion and slower auto production during the quarter than we had assumed. 1H14 profit represents 38% of our old FY14 projection.
Results highlights
Revenue declined by 10% YoY and 9% QoQ to Bt2.6bn, due largely to lower domestic car sales and production with the end of deliveries under the first-time car buyer scheme in June 2013. Note that 3Q13 vehicle output declined by 9.6% YoY and 4.9% QoQ to 589k units.
The firm’s newest (seventh) production line’s run rate rose to 80% from 75% during 1Q14 (April-June 2013). Management expects it to approach 100% by March 2014. Note that 2Q14 gross margin slipped to 20.3% from 21.5% the previous quarter and 20.6% in 2Q13 because auto production declines among car makers during the quarter led to a lower mean utilization rate among STANLY’s six established lines.
Outlook
We anticipate that the firm will deliver a slight YoY earnings contraction  for 3Q14 (Oct 2013-Dec 2013), due to the impact of the end of the first-time car buyer scheme—greater exports probably won’t fully offset the effect of weaker domestic sales.
What’s changed?
We have cut our FY14 and FY15 sales forecasts by 6% and 10%, respectively, to reflect weak domestic car sales and the postponements of the launches of new models to next year. As such, our FY14-15 earnings forecasts dive by 22.5% and 21.7%, respectively, to Bt1.55bn and Bt1.75bn.
Recommendation
Although the July-December outlook for automotive production is subdued, given slowing consumption and the absence of the first-time car buyer scheme, we expect vehicle output to recover next year on the launches of new models and rising export sales. We, thus, are positive about STANLY’s prospects next year—rising capacity utilization and new orders from Toyota and Honda for new models. We have rolled over our investment horizon to end-March 2015 and arrived at a new target price of Bt240, pegged to a PER of 10.5x (STANLY’s long-term mean). Our BUY rating stands.