Equity Analysis /

Delta Electronics Thailand PCL: Major investor questions—will margin be sustained?

  • Was the record 2Q20 margin just a one-off event?

  • DELTA expects strong sales growth in 2H20

  • Waiting for a better entry price

Napon Jaisan
Napon Jaisan

Equity Research Analyst

Bualuang Securities
7 August 2020

Following a meeting with DELTA executives last Monday, local investors wondered whether the fat GM of 2Q20 can be sustained. We think GM will decline, but rising sales should support profit growth in 2H20. The key topics of discussion were as follow:

Was the record 2Q20 margin just a one-off event?

DELTA’s GM in 2Q20 was fat, boosted by both operational and extra factors. The chief operational factors were a weaker baht against the US dollar and lower input component costs. The extra factor was a surge in orders for high-end data center and white box products, as clients panic-ordered in order to head off shortages in the COVID-19 era. Management said the shift in the product mix boosted GM by 1-2% in 2Q20, implying that its normal GM would be 25-26%. We expect DELTA’s GM to dip to 25.2% in 3Q20 and 24.6% in 4Q20.

The 2H20 cloud CAPEX spending outlook is mixed. Microsoft expects strong data center spend to continue; Amazon is less bullish; Alphabet doesn’t expect much change; Facebook is modestly positive. Supply chain companies also delivered mixed messages. There is broad agreement that sales will slow in 2H20 after four quarters of hefty cloud CAPEX, but Intel expects a sharper 2H20 slowdown than Seagate.