DELTA is another Dutch tulip bubble waiting to burst, sell in the rally

How many times have you thought that you should have purchased something but missed the boat?

Well, investors in Stock Exchange of Thailand (SET) missed the ship not the boat with Delta Electronics Plc (DELTA). Shares of Delta has risen more than 675 per cent in the past 1-year and nearly 146 percent in the past 3-months, not to mention nearly 93 percent in the past 1-month alone.

Shares of DELTA which traded at a mere 51.75 baht on the 1st trading day of 2020 saw a collapse in its share price to 27 baht a piece on March 13, 2020 before reversing its downward trend and surging to a high of 406 baht a piece on December 9, 2020.

As of Friday, the shares were trading at 361 baht a piece raising the market capitalization of DELTA at 450 billion baht. This is just shy of the 682 billion baht market capitalization of the Taipei listed Delta Electronics Inc. parent company of DELTA. The data from the SET shows that the parent company in Taiwan holds 63.78 per cent of Thailand based DELTA.

According to Bloomberg DELTA’s Thailand based operation is trading at current price to earnings (PE) ratio of 65.79x and estimated 12-months forward PE of 65.85x, whereas its parent company is trading at nearly half the PE with current PE of 27.84x and 12-months forward PE of 25.41x.

If the PE was not a good enough comparison, when take a look at the revenues of the subsidiary company and the parent company.

As per Bloomberg as of 2019 DELTA reported revenues of 51.17 billion baht and a profit of 2.96 billion baht, while its parent company in Taiwan reported revenues of 284 billion baht and a net profit of 24.5 billion baht. Despite having profits of 8 times more than the Thai subsidiary, the parent company in Taiwan is valued at just over 51 per cent more than the Thai subsidiary.

Although profit margins have been on a rise thanks to the higher demand for the products of DELTA the earnings multiples is not truly justifiable for DELTA.

HYPE in the Market

As a trader my take on the hype (148+ per cent in last 3-months, 675 per cent in 1-year) in stock performance could be due to the surge in demand for products made by DELTA as people work from home.

As most of us are aware, the coronavirus pandemic has accelerated the digitalization trend globally. With more than half of employees globally shifted to Work-From-Home and travel overseas became almost impossible, demand for IT products has surged exponentially by both work and educational sectors, which, in turn, led to surge in demand for electronics components.

This trend has helped benefit the likes of DELTA, along with other electronic names such as Hana Microelectronics (HANA) which has surged by about 29 per cent, and KCE Electronics Plc (KCE) which has surged by about 98 per cent over 1-year period.

Low Free Float allows shares to rise

We think the key factor behind the explosion in price performance lies in the per cent of free float – the shares of a company than can be publicly traded and are not held by insiders and is available to the public for trading in the secondary market – number.

Put simply, DELTA shares, in reality, are easier for speculators in “cornering” the market compared to its electronic peers.

FINANCIALS

The surge in demand for good produced by DELTA has also helped the company, as seen by the company’s 3rd quarter results. During the 3rd quarter ending September 2020 DELTA reported a net profit of 2.6 billion baht, which was a 327 per cent year on year (YoY) rise, and 31 per cent quarter on quarter (QoQ) rise, beating the Bloomberg consensus number by a whopping 13 per cent.

The better than expected performance was attributed by higher-than-expected exchange gain of 106 million baht. Excluding this item, the core profit would be 2.5 billion baht, in line with estimates.

Key support came from the power electronics group where sales rose sharply 43 per cent YoY and 29 QoQ, backed by strong growth in data center demand and the recovery in EV solutions.

Looking into Q4 2020, based on company guidance, we think its core profit would still expand YoY but drop QoQ, driven by soften QoQ  seasonal effects and lower demand from data center as demand in this segment were partially front-loaded during the COVID19 pandemic.

Our Verdict

We think DELTA shares are rated ‘SELL’ at this level.

Based on FY2021 Earnings-per-share estimates, its earnings per share (EPS) will be around 6.2 baht per share. Applying our most aggressive target PE multiples of 30x, we derive its “Fair” price of 186 baht (versus its current price of 360 baht currently, implying around 50% downside from our estimates).

In other words, its current share price implies around 60x PE ratio, which, in my opinion, already reflects all positive catalysts in this word and becoming very fragile on even the slightest disappointments.

Our take is that, as I stated I the heading, this tulip will burst some time in 2021.

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