Delta Electronics (DELTA): 3QFY17 net profit seen up 14% y-y and 90% q-q October 19, 2017

3QFY17 net profit seen at Bt1,599mn, up 14% y‐y and 90% q‐q: We forecast DELTA to report a very strong set of results for 3QFY17 compared to 2QFY17 due chiefly to the absence of a Bt992mn tax provision as recorded in 2QFY17. Stripping out this ex‐item, 3QFY17 core profit is expected to be 11% higher than what it achieved in 2QFY17 on the back of better margins and a slower pace of increase in SG&A expenses. Even though 3Q is traditionally the peak season for electronics sales, we expect 3QFY17 sales will rise a meager 1% q‐q to US$363mn as the auto‐fan segment has run short of capacity to meet growing demand and the new tax system has also taken a bite out of sales in India. Margins tend to be higher than the levels seen in 2QFY17, helped by a richer mix of sales from high‐margin products. SG&A expenses are also expected to grow at a slower pace.

FY17 profit downgrade: The weaker‐than‐expected sales outlook prompts us to slash our FY17 net profit view for DELTA to Bt5,229mn, which represents a drop of 5% y‐y. In the new forecast, we trim our FY17 sales outlook for DELTA to Bt48,423mn but the new sales target still implies a growth of 3% y‐y. The negative effects of the baht’s rise should also drag full‐year margins lower from a year earlier.

Rating cut to ‘NEUTRAL’ with Bt88/share target price: Notwithstanding that we remain optimistic about its future earnings growth outlook supported by its well-structured business platform, limited upside potential from current trading levels, however, give us an excuse to cut our rating on DELTA shares to ‘NEUTRAL’ with a FY18 target price of Bt88/share.

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