Margins on the mend

Net and normalised profits in 2002 were 3% higher than our forecasts due to strong sales and a marked improvement in margins in 4Q02. Revenue from SPS, CRT monitors and DC fans were in line with our expectations while sales of flat screen monitors were slightly better than our estimates. This year we expect operating margins to rise from 9.1% in 2002 to 10%, with sales slowing to 5.6% versus 33% revenue growth last year.

We have fine-tuned our 2003 net profit forecast to Bt4.41bn, up 33% yoy. Normalised earnings are forecast to grow 15% to Bt4.5bn. With the acceleration in profit growth and reduction in working capital requirements, DELTA’s free cash flow should surge from Bt1.45bn last year to Bt4.3bn by year-end.

The stock is trading on an undemanding 2003 PER and EV/EBITDA of 8.2x and 6.2x respectively. It will pay a dividend of Bt2.8/share for 2002 operations, representing a yield of 9.2%, with the stock going XD on February 19. Based on its strong free cash flow, the company should be able to maintain its 100% dividend payout policy during 2003-2004. We expect it to pay dividends of Bt3.7/share for 2003 and Bt4.2/share for 2004, representing yields of 12% and 14% respectively.

Improving margins to boost profits in 2003

DELTA’s normalised earnings rebounded 10% qoq in 4Q02 to Bt980mn in 4Q02 due to higher sales and broader margins. However, net profit for 2002 fell 14% to Bt3.32bn, due to Bt627mn in extraordinary losses. These included a Bt399mn forex loss and a Bt229mn write-off for bad debt. Revenues in baht terms jumped 33% in 2002 to Bt40.5bn, aided by DELTA’s launch of its fat panel production line. As flat screens generate lower margins, the company’s operating margins fell from 12.1% in 2001 to 9.1%.

In 4Q02 operating margins rose to 7.9% from 6.4% in the previous quarter while gross margins improved from 14.4% to 15.3%. DELTA was able to reduce overheads as a percentage of sales from 7.9% in 3Q02 to 7.4%. Bolstered by improved economies of scale, gross margins on flat panel screens rebounded from a low of 5% in July-October 2002 to 8% in November-December. Management is aiming to lift gross margins on flat screens to 10-12% this year. We estimate DELTA’s gross margins will widen slightly from 16% last year to 16.6% in 2003.

Figure 1: Gross margins and forecasts

Although SPS sales are likely to be flat this year, this product line should generate higher margins, particularly for SPS equipment for mobile phones and cellular cell sites. CRT monitor sales are expected to decline at least 20% a year in 2003-2004 as the popularity of flat panels grows. Lower CRT revenues will be offset by increases in flat screens. Even with declining revenues, DELTA should be able to maintain CRT monitor gross margins at 12-14%. Utilisation of DC fan production has now reached 80% following its start-up in 4Q01. Management expects 30% sales growth from this product this year, with net margins close to 25%.

100% dividend payout to continue in 2003-2004

Strong sales and reduced working capital requirements improved DELTA’s cash flow in 4Q02, with cash reserves rising from Bt6.3bn in 3Q02 to Bt7.9bn at the end of December. DELTA has more efficiently managed its working capital, which has declined from Bt6.5bn in 3Q02 to Bt5.0bn. Of its Bt3.8bn inventory in 4Q02, 74% is classified as finished goods – mainly flat screen monitors. Accordingly, we expect strong sales of flat panels over the next few months.

The company wrote-off US$5mn in bad debt owed by Trend Technology in 4Q02. In addition, DELTA recorded Bt399mn in forex losses, of which about 87% are unrealised. We estimate DELTA’s net US$ exposure at about US$300mn. Management has taken out forward contracts for nearly US$200mn at about Bt42/US$ in order to protect itself against forex fluctuations in 1H03.

Based on its strong free cash flow, the company should be able to maintain its 100% dividend payout policy during 2003-2004. We expect it to pay total dividends of Bt3.7/share for 2003 and Bt4.2/share for 2004, representing yields of 12% and 14% respectively. We expect average capex of Bt600mn a year over this period, in line with the company’s investment expenditure of Bt622mn last year.