Thai Stanley Electric

Good earnings profile

Thai Stanley Electric Plc (STANLY)

Investment thesis

We maintain our BUY rating on STANLY, premised on: 1) strong earnings growth of 127% in FY13 and 21% in FY14, driven by production expansion, 2) rising capacity utilization at the new factory (Ramp#7) in FY14 (April 2013-March 2014), 3) a debt-free financial position and 4) low PERs of 10.1x for FY13 and 8.3x for FY14 (significantly below its last peak PER of 14.4x in 2004).

Strong 4Q13 (Jan-March 2013) sales growth outlook

Management anticipates that 4Q13 sales will exceed Bt3bn following sales of Bt2.9bn in 3Q12. The firm forecasts FY14 sales expansion of 5-10%, driven by the big backlog for delivery of cars under the first-time car buyer tax rebate scheme and the launches of new car models. STANLY said that 900K units of eco-cars (60% of total new car sales in calendar year 2013) that qualified for the first-time car buyer scheme are to be delivered between January and June 2013. We forecast that the firm will post sales of Bt9.9bn for FY13 and Bt11.4bn for FY14.

Net profit margin continues to improve

Excluding the new factory (Ramp#7), STANLY's plants are running at utilization rates of above 90%. Even Ramp#7's run rate has increased from 20% in 2Q13 to 50% in 3Q13. Management guides that Ramp#7's utilization rate will rise to 90-100% within six or seven months. That should push up STANLY's gross margin from 15% in 3Q13 (12.8% in 2Q13) to 16-17% in 4Q13, its pre-4Q11 flooding level. Given rising capacity utilization, we project net margins of 16.6% in FY13 and 17.5% in FY14.

Further capacity expansion of 5-10% in FY14

Management plans to invest Bt1.8bn in a new factory in FY14, which will expand production by 5-10% in order to cater to rising demand from major car makers, such as Honda, Nissan and Toyota. The new plant will be financed entirely by internal cash flows, according to STANLY. Note that the firm currently has net cash in-hand of Bt2.5bn.

No impact from minimum wage increase

STANLY said it had increased its minimum wage rate to Bt300/day last calendar year, so higher staff expenses are already priced into its cost structure. We expect rising economies-of-scale and good OPEX management to enable the firm to push up its net profit margin further in the quarters ahead.