Delta Electronics (Thailand)

Delta Electronics (Thailand) Plc (DELTA) 

In line with our estimate
DELTA unveiled a 4Q13 net profit of Bt1.1bn, down 34% QoQ but up 35% YoY. The result was in line with our estimate and the street. Stripping out an FX gain and extra items, core earnings would be Bt1.0bn, down 34% QoQ but up 32% YoY—somewhat lower than our estimate of Bt1.1bn. DELTA announced a DPS of Bt2.7 (XD on Feb 28; payment on April 9).
Results highlights
4Q13 sales softened 5% QoQ but rose 3% YoY to Bt11bn. The YoY increase was led by greater sales of cloud computing componentry; the QoQ decline was due to seasonality. GM was 24.8%, down 245 bps QoQ (despite baht depreciation), as DELTA set an inventory provision for the quarter. The SG&A/sales ratio was 15.4%, close to the firm’s target of 15% and down 179 bps YoY on a cost-saving program. There was also an FX gain of Bt69m. As such, the bottom-line came to Bt1.1bn, up 35% YoY.
Outlook
We expect DELTA to post stronger YoY and QoQ earnings for 1Q14. The top-line is likely to decline QoQ on seasonality but rise strongly YoY. GM will expand QoQ because of a sales mix shift in favor of high-margin product categories and a fatter GM at the trading business. Looking to FY14, we believe that the firm will deliver strong sales growth of 10%, led by cloud componentry, automotive componentry and power supplies for telecoms infrastructure and industrial and medical equipment. GM should also rise YoY, driven by a sales mix improvement. DELTA aims to expand the proportion of fat-margin products in its sales mix from 75% in FY13 to 80% in FY14. The SG&A/sales ratio should decline further on cost savings.
What’s changed?
Our FY14 earnings forecast stands unchanged at Bt5.7bn, up 6% YoY. The key variables in our model involve the risk of price erosion among solar invertor products, the possibility of inventory provision write-backs and foreign exchange rates.
Recommendation
DELTA trades at an FY14 core PER of 12x, in line with Electronics peers, but its forecast core earnings growth of 16% is much lower than the average for our coverage of 30%. Although we believe the share price largely reflects the firm’s fair FY14 earnings outlook, the huge DPS of Bt2.7 translates into a dividend yield of 5.1%, which should support against downside share price risk. We have downgraded our rating from BUY to HOLD with a YE14 target price of Bt54.0.