Delta Electronics

Delta Electronics Plc (DELTA) 

 

 We returned from DELTA’s analyst meeting with a slightly positive view of the stock’s outlook, based on management’s confidence in the company’s long-term growth story and an expected recovery in coming quarters. Although management provided no new information, it reaffirmed its guidance for revenue to increase quarter-by-quarter until the end of the year, which should be positive to sentiment in the share price. We fine-tuned our projections following the release of DELTA’s earnings, resulting in insignificant cuts (-1-2%) in net profit in 2016-18, which will not impact our target target price (Bt77). We upgrade the stock’s rating to Outperform (from Neutral) due to the upside that has emerged following the recent share price correction. 

 

Investment highlights 

 

- More confidence in recovery after management maintains targets and outlook for 2016. Despite the company’s soft start to 2016, management confirmed its growth target for revenue of 0-3% for 2016, of which 40-45% will be booked in the first half, while the remaining 55-60% will be booked in the second half. This implies recoveries in both revenue and earnings over the rest of the year.  

 

- Economies of scale should drive improving earnings in coming quarters. 

 

The decline in GPM was due mainly to lower economies of scale (lower sales) and the strengthening of the THB against the USD in 1Q16, which squeezed GPM to 26.4% in 1Q16 from 28.2% in 4Q15. The increase in SG&A in 1Q16 was due mainly to provisions and the normalization of R&D expenses over every quarter this year. This suggests SG&A should be quite flat in 2Q-4Q16, which implies a widening of profitability over the remaining quarters of the year. 

 

- Earnings downgrade momentum should stall. Although 2016 will still be a challenging year for the company, we believe the earnings-downgrade pressure should ease given the increased visibility of an earnings recovery in 2Q-4Q16. Our view is that the share price has already priced in the recent bad news. We think the market will wait to see the recovery in 2Q16 before making further adjustment. 

- Long-term growth from India and automotive sector but it will take time. 

 

The Indian market should be the next driver of growth for high-end products. Also, the automotive segment is expected to be a potential high-growth area over the next 3-5 years. Although these businesses is promising, it currently account for only 12% and 4% of DELTA’s total revenue respectively. 

 

- Fine-tune earnings down by 1-2% in 2016-18. We increase our GPM assumption from 26.7% to 27.0% for 2016 and to 26.9% to 27.3% for 2017-18. We have also factored in higher R&D expenses by raising SG&A by 5-6% for 2016-18, resulting in higher SG&A/sales from 13.5% to 14.3% for 2016 and 13.4% to 14.1% for 2017-18. This results in our net profit estimates falling 1-2% for 2016-18, while we expect core earnings will be 2-3% lower over the same period. 

 

Valuation 

- We maintain our target price at Bt77 based on a PE multiple of 14x (unchanged), which is +1.33SD of DELTA’s 5-year average for forward PER. This is slightly lower than the 15X we use for its peers given DELTA’s moderate growth outlook. We upgrade our stock rating to Outperform (from Neutral) due to the upside that has emerged following the recent correction in the price. We now see 9.2% upside and a 13.86% total return.