Delta Electronics

Delta Electronics Plc (DELTA)

- To focus on increasing profitability in 2014
DELTA will be focusing on enhancing profitability in 2014. DELTA conservatively
expects FY2014 sales volume (in US$) to grow by only 5-10% (lower than our
expectation),but it would accelerate growth of high-margin products: 1) power
supply products used in data center business, 2) auto parts, especially power
charger products for hybrid cars, and 3) power supply products used in telecom
business. FY2014 gross profit margin is expected to increase from 2013 by 50-
80bps (close to our projection). Moreover, DELTA is projected to have a good
control on operating cost, keeping SG&A/Sales below 15%. All these factors
would help boost FY2014 net profit. DELTA's FY2014 investment budget is
US$20m (close to 2013), mainly for expanding production capacity for assembly
line in factory in India, as well as replacing human labor with machines to reduce
labor cost. Moreover, DELTA has additional investment budget of US$50-100m
for the acquisition of other businesses (possibly in 2014). DELTA is possibly
aiming for overseas product distribution business in solar power industry to boost
sales volume immediately, as DELTA's solar inverter business (focusing on
production) is still facing loss. There is not much information about the
acquisition plan, but with DELTA's strong financial position (B13bn cash and
nearly no debt), the FY2014 investment plan is not likely to affect DELTA's
financial structure much.
- 4Q13 net profit to weaken as expected due to low season
We project DELTA's 4Q13 net profit at B1.09bn, falling 33.3%qoq but growing
34.6%yoy, due to the following factors: 1) 4Q13 is a low season for worldwide
electronic part sector. 2) DELTA has set additional inventory provision. 3) There
is seasonal expense in 4Q. Thus, FY2013 net profit is projected at B5.4bn,
growing 24.6%yoy (8.2% above our projection). We maintain our FY2014-2015
net profit growth forecast at 24%yoy and 16%yoy, respectively. Moreover, THB
depreciation is likely to boost DELTA's sales and gross margin, thus raising
FY2014-2015 net profit. Nearly 100% of its income is in foreign currencies
(mainly US$), whereas some of its cost is in THB (20% of operating cost).
- To benefit from weak Baht. FY2013 dividend yield is 5.2% p.a
We recommend "BUY". We derive fair value (DCF, 11.58% WACC) at B70.40,
implying 38% upside. Moreover, FY2013 dividend is estimated at B2.65/share, or
5.2%p.a dividend yield (paid once a year).