Delta Electronics Thai: Three near-term negatives pressuring share price
- Downgrade to SELL with a lower TP of THB84
- 4Q24 result a big miss; profit tumbled 54% y/y and 64% q/q, hit by weak gross margin and surge in SG&A expenses
- FY25-26F earnings cut by 11-12% on higher SG&A expenses; FY25F earnings to drop 2% before rebounding 13% next year
- SET’s plan to cap stock weights at 10% in certain indices could result in selloff by index-tracking funds
4Q24 net profit plunged 54% y/y. Despite the 10% growth in revenue, DELTA’s 4Q24 net profit tumbled 54% y/y to THB2.2bn in 4Q24. This was due to:
- drop in gross margin from 24.5% in 4Q23 to 22.5% in 4Q24 due to warranty provision and rebate to customers;
- a 63% jump in SG&A expenses, particularly royalty expenses in line with the surging AI power sales, and legal fees;
- an increase in effective tax rate from 9.7% in 4Q23 to 15.8% in 4Q24, as DELTA India paid additional tax amounting to INR 400mn as assessed by the Indian tax authorities;
- forex loss of THB329mn in 4Q24 vs loss of THB93mn in 4Q23
2024F net profit grew 3% y/y to its new high at THB20.8bn. Despite weak net profit in 4Q24, net profit inched up 3% in 2024F, due to the strong results in 9M24. For the year, net profit rose 3% y/y due to a12% increase in sales and wider gross margins, from 22.9% in 2023 to 24.6% in 2024.
Revenue grew 11% y/y but eased 2% q/q to USD1.2bn in 4Q24. On a y/y basis, growth came from all businesses except for the Mobility Group, which saw flat revenue, amidst the slowdown in global automotive sector.
For 2024, total revenue grew 12% y/y to hit an all-time high at USD4.6bn. The growth was primarily driven by the Power Electronics group, which saw a 15% increase and accounted for 54% of total revenue. Key products contributing to this growth were power supplies for data centers and AI-related applications. The Infrastructure Group also performed strongly, posting 15% revenue increase. In contrast, the Mobility Group, which had been a major growth driver in 2021-2023, experienced a slowdown with just 6% growth, reflecting the broader slowdown in the global automotive sector.
Gross margin plunged sharply to 22.5% in 4Q24 from 24.5% in 4Q23 and 27.6% in 3Q24. This was due to:
- a USD16.2mn warranty provision to clients due to defects caused by the Magnetics Solution Business Unit (MSBU);
- 3mn loss from standard cost adjustment due to change in FX;
- 8mn rebate to datacenter customers based on frame agreement.
In fact, DELTA recorded a THB290mn reversal of inventory provisions in 4Q24. This helped gross margin somewhat. Nonetheless, the negative impact from the three factors mentioned above was larger and thus resulted in higher cost of goods sold during the period, thus dragging down overall gross profit margin to 22.5% in 4Q24 and 24.6% in 2024.
SG&A expenses jumped 63% y/y to THB7.2bn in 4Q24. SG&A expenses to sales ratio surged from 11.7% in 4Q23 to as high as 17.2% in 4Q24. These came mainly from:
- a 45% jump in royalty expenses to the parent company, (Delta Electronics Inc. - Licensor) to THB3.5bn, in line with the rising production of products under the licensor’s patents and technology. This made up 8.3% of revenue in 4Q24, up from 6.3% in 4Q23;
- legal fees of THB1bn in 2024, where over 80% was recorded in 2H24;
- a 51% surge in R&D expenses.
Announced a DPS of THB0.46 for 2024 performance. This represents a 30% dividend payout ratio. The stock trades ex-dividend on 27 Feb 2025 and dividend payment will be made on 28 Apr 2025.
Approved construction of three new plants in Bangpoo, Samut Prakan. DELTA’s board of directors has approved the construction of three new plants (D16, D17, and D18) in Bangpoo, Samut Prakan. Construction will start in Feb 2025 and complete in Sep 2026. These plants will support capacity expansion in the Power and Systems Business Group, Information Communication Technology Infrastructure Business Group (ICTBG) high growth potential and its R&D expansion. These require a total investment of THB3.4bn, which will be funded entirely by internal cash flow. Note that DELTA had cash on hand amounting to THB13.9bn as at end-2024.
The following table summarizes DELTA”s expansion projects which have been approved by its board of directors and construction will be completed within 2025-26.
Outlook
Expect 2025 sales to grow 10-15%, boosted by higher demand for datacentre power management solutions to support AI-driven applications. We expect revenue in USD terms to grow 13% and hit a new high of USD5.2bn in 2025F. This should be supported by robust sales growth of the Power Electronics group, driven by power management solutions for datacentres and DC power systems to support an uptrend in AI-driven applications. The proliferation of AI technologies has propelled investments in datacentre and networking infrastructures towards high growth performance computing.
Royalty expense should continue to increase, keeping SG&A expenses elevated. This is due mainly to the increase in the demand for high-performance power to support AI-applications. These are mainly under the license from its parent company. Hence, SG&A expenses should continue to stay elevated.
2025 earnings subject to OECD’s global minimum tax rate of 15%. While pretax profit should continue to grow, we expect net profit to drop 2% in 2025 as we factor in a 15% effective tax rate to be in line with the OECD’s Pillar 2 on global minimum tax rate of 15%. Note that DELTA always receives BOI promotional privileges, and the company’s tax rate therefore has been in the range of 2-6%.
To alleviate the impact on companies subject to this top-up tax, Thailand’s board of investment (BOI) has proposed to inject the top-up tax into the National Competitive Enhancement Fund. The fund can then provide some tax rebate to these affected companies in the form of support for their R&D expenses. Further details, however, have yet to be finalised on rebate criteria and timing of the rebate. We have not factored in the rebate into our current forecasts.
Potential negative impact from the SET’s plan to cap stock weights in certain index calculations. The SET aims to implement a 10% weight cap for individual stocks in the four indices calculation including SET50, SET100, SET50FF, SET100FF. The goal is to mitigate the influence of any single large stock’s price movement on these indices and ensure better diversification. The proposed changes align with global best practices in index design. DELTA is the only company with a market capitalisation’s weighting exceeding 10% in these indices. This may lead to a sell-off of DELTA by index-tracking funds ahead of the change.
Based on DELTA’s share price at THB113 as of 14 Feb 2025, its market cap was still 12.3% of the SET50 Index’s market cap. We see potential 18.6% downside risk to current share price from the rebalancing.
Key changes in assumptions. We cut our 2025F-2026F earnings by 11-12%. This reflects higher SG&A expenses assumptions. Based on our revised forecasts, earnings should drop 2% in 2025, before rising 13% in 2026F.
Recommendation
Downgrade to SELL from Fully Valued with a lower TP of THB84. We have cut our forecasts by 11% and 12% this year and next to reflect higher SGA expenses assumptions. Based on our revised forecasts, earnings are expected to drop 2% this year, before rising 13% next year. The stock is still trading on a hefty PE of 75x in 2025 which is excessive compared with its muted growth this year. DELTA’s share price has dropped 20% since we downgraded the stock to Fully Valued last month. But we see further downside, and therefore downgrade the stock to SELL from Fully Valued with a lower TP of THB84 based on 56x PE in line with its historical average.
Quarterly / Interim Income Statement (THBmn)
FY Dec | 4Q2023 | 3Q2024 | 4Q2024 | % chg y/y | % chg q/q |
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Revenue | 37,759 | 43,225 | 41,747 | 10.6 | (3.4) |
Cost of Goods Sold | (28,495) | (31,298) | (32,372) | 13.6 | 3.4 |
Gross Profit | 9,264 | 11,927 | 9,375 | 1.2 | (21.4) |
Other Oper. (Exp)/Inc | (4,418) | (5,947) | (7,194) | 62.8 | 21.0 |
Operating Profit | 4,846 | 5,981 | 2,181 | (55.0) | (63.5) |
Other Non Opg (Exp)/Inc | 428 | 362 | 694 | 62.3 | 92.0 |
Associates & JV Inc | 0.0 | 0.0 | 0.0 | nm | nm |
Net Interest (Exp)/Inc | 35.6 | 55.7 | 10.9 | (69.4) | (80.4) |
Exceptional Gain/(Loss) | (93.4) | (350) | (329) | (252.8) | (5.8) |
Pre-tax Profit | 5,216 | 6,048 | 2,557 | (51.0) | (57.7) |
Tax | (506) | (139) | (405) | (20.1) | 190.8 |
Minority Interest | 0.0 | 0.0 | 0.0 | nm | nm |
Net Profit | 4,711 | 5,911 | 2,154 | (54.3) | (63.6) |
Net profit bef Except. | 4,805 | 6,261 | 2,483 | (48.3) | (60.3) |
EBITDA | 6,612 | 8,122 | 4,198 | (36.5) | (48.3) |
Margins (%) |
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Gross Margins | 24.5 | 27.6 | 22.5 |
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Opg Profit Margins | 12.8 | 13.8 | 5.2 |
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Net Profit Margins | 12.5 | 13.7 | 5.2 |
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Source: Company, DBSVTH
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