Analysts bullish on Success Transformer

KENANGA Research
21-08-2008


KENANGA Research, which has a buy rating and a target price of RM1.43 on Success Transformer Corporation Bhd (STCB), is bullish on the company's prospects going forward saying that it expected demand for STCB's products to remain robust despite the challenging macroeconomic environment.

"Our likes include the management's strong execution track record and capability, rising prospects for its key divisions as well as the undemanding valuation of 5.4 times based on our conservative FY08F," the research house said in a recent note.

Commenting on the company's results for the second quarter ended June 30 2008, Kenanga said that the half-yearly top line of RM91.3 million was 52% of its full-year forecast while the RM11.68 million half-yearly net profits were 59% of the forecast.

It pointed out that the quarter-on-quarter top line was up 14% due to a 19.3% improvement in STCB's traditional transformer and industrial lighting division, while process equipment was up by 6%. Net profits meanwhile jumped 30.3% due to better margins from the process equipment division.

The research housed added that the fifth Seremban factory is on course for completion by year-end, to add an additional 20% fabrication capacity and that the company's Chinese joint venture (JV) is slated to begin production in September.

To recapitulate, STCB has a JV under 60%-owned Ningbo Success Zhenye Luminaire Ltd since May this year to design and manufacture light fixtures and fittings. The JV comes with a 24-month profit guarantee of RMB7 million (RM3.4 million) beginning September.

The JV is expected to enable the company better control over quality, costs and delivery of its upstream lighting products, said SJ Securities Research which has an overweight call on the STCB stock at a fair value of RM1.45.

STCB's 2QFY08 results had exceeded the research house's expectations. It said that STCB's revenue and net profit were 54.6% and 64.6% respectively of its full-year estimates.

"We are again impressed by the management's ability to consistently improve and add value to the company. We therefore reiterate our overweight recommendation on STCB with an unchanged fair value of RM1.45, pegging a forward price-earnings ratio (PER) of 7.6 times."

The research house noted that all segments had performed strongly, concurring with Kenanga Research's view that the performance was commendable despite the challenging economic climate.

However, it pegged a lower forward PER on the stock due to poorer valuations of stocks listed on Bursa, pointing out also that STCB was trading at an undemanding forward PER of 4.7 times.

Success Transformer slipped one sen to close at 89 sen yesterday.

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