Expansion Into AI And Hydrogen Energy Will Strengthen Future Global Presence

Key Takeaways

• AI and robotics investments boost Delta Electronics' revenue and profitability amid rising automation demands.
  
• Expanding production in key regions mitigates tariffs, optimizing costs and benefiting margins.
  
• Increasing operating expenses and market challenges in key segments may pressure Delta Electronics' net margins and overall profitability.

Catalysts

Provides power and thermal management solutions in Mainland China, the United States, Taiwan, Thailand, and internationally.

• Delta Electronics is poised for growth in its AI server business due to increasing capital expenditure by major U.S. hyperscalers. This expected demand surge will likely increase revenue in the future as AI-related infrastructure continues to expand.
  
• The company's investment in robotics and AI components can potentially improve net margins as these higher-value products become more integral to automation across industries, leading to increased profitability over time.
  
• Expansion of production capacity in multiple regions (China, Thailand, Taiwan, and the U.S.) for liquid cooling components is expected to address tariff impacts and optimize manufacturing costs, which could positively impact net margins.
  
• Strong ongoing demand for data center-related products, such as power electronics and thermal management solutions, is projected to support revenue growth, given the increasing reliance on data-driven technologies.
  
• Delta Electronics is investing in hydrogen energy solutions, which could become a significant revenue driver as global energy needs shift towards sustainable solutions, enhancing long-term earnings potential.

Delta Electronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Delta Electronics's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 10.3% in 3 years time.
• Analysts expect earnings to reach NT$66.1 billion (and earnings per share of NT$23.39) by about July 2028, up from NT$39.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NT$103.8 billion in earnings, and the most bearish expecting NT$50.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, down from 34.7x today. This future PE is greater than the current PE for the TW Electronic industry at 18.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Delta Electronics Future Earnings Per Share Growth

Risks

• Seasonal variations and normalization of inventory provisions have caused a decline in GP margin, potentially impacting net margins.
  
• Mobility continues to experience weakness due to market demand, leading to ongoing profit contraction in this segment, which could affect overall earnings.
  
• There are significant non-operating losses and expenses related to foreign exchange and the impairment of investments, impacting the bottom line profitability.
  
• Increasing operating expenses, notably in R&D and SG&A, may pressure net margins if not accompanied by proportional revenue growth.
  
• The EV business faces significant challenges due to tariffs and market uncertainty, which could hinder potential revenue growth in the short term.

Valuation

• The analysts have a consensus price target of NT$512.778 for Delta Electronics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$630.0, and the most bearish reporting a price target of just NT$352.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$643.9 billion, earnings will come to NT$66.1 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 6.8%.
• Given the current share price of NT$530.0, the analyst price target of NT$512.78 is 3.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.