Delta Electronics (DELTA): Auto & India hold key to earnings recovery in FY18 November 1, 2017

FY17 profit downgrade: The 9MFY17 profit miss and the prospect of a seasonal increase in provisions and faltering sales in 4Q have prompted us to nudge our FY17 profit forecast for DELTA lower to a mere Bt4,993mn, down 9% y‐y. The profit downgrade comes as we lower our margin outlook for the year to 25.5% due to inventory provisions and the negative effect of the 3% rise in the baht against the US dollar and we revise upwards our SG&A expense forecast to reflect bigger‐than‐expected R&D expenses. For the year, sales are projected to be 3% higher than a year earlier at Bt48,422mn.

Auto & India sales seen as key growth drivers: Management has placed a premium on high‐margin, high‐growth products in the auto segment i.e. power supply and fan products and sales growth in India. Sales from auto segment and India are expected to grow at a double‐digit pace over the next couple of years. In 9MFY17, sales from auto segment and India contributed 10% and 15% of total sales respectively.

FY18 profit set to return to positive growth of 19% y‐y due chiefly to absence of exceptional charges: We expect DELTA will return to positive earnings growth in FY18, largely helped by the likely absence of exceptional charges. Even though sales from high-growth product segment are expected to grow in double digits, it however contributes little to total sales. As a result, we expect DELTA will see sales growth of only 3% y‐y to Bt49,999mn in FY18. Expenses also look set to rise notably from R&D activities but margins are likely to improve on the back of growing sales. On this basis, we estimate DELTA will see its net profit rise 19% y‐y to Bt5,955mn in FY18.

‘NEUTRAL’ rating unchanged with FY18 target price of Bt86/share: Notwithstanding that we foresee an earnings recovery story for DELTA in FY18, limited upside potential from current trading levels however give us an excuse to keep a ‘NEUTRAL’ rating unhanged with a FY18 target price of Bt86/share.

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