Success Transformers - 1HFY08 Results Review

OSK Investment Research
August 19, 2008


So Far So Good
Success Transformers’ (STC) 1HFY08 net earnings of RM11.7m is in line with our forecast. 1H revenue and earnings grew strongly by 39.6% and 43.9% respectively contributed by strong sales from all divisions. The current quarter also incorporated the full contribution of its newly-acquired 100% subsidiary, Seremban Engineering SB (SESB), which boosted q-o-q revenue and earnings by 14.1% and 29.1% respectively. We expect its China operation to contribute positively in 4Q. There are no changes to our earnings forecast at this juncture and we are maintaining our BUY recommendation with a target price of RM1.57.

Margins slightly lower. 1H EBITDA margin was slightly lower at 20.9% compared with 22.2% previously owing to the nature of SESB’s business, which fetches a slightly lower margin than STC’s core business of manufacturing transformers and industrial lighting. Hence, it pulls down the group’s overall margin.

Tapping Chinese market. STC’s 60:40 JV in China will enable the company to open its marketing network in the country. This JV Co., which mainly manufactures industrial lighting products, will start operation on early September ‘08. As a commitment to this JV, the Chief Executive Officer of the JV Co. - also the owner of the remaining 40% equity interest – has given a total profit guarantee of Rmb7m for a period of 24 months commencing September ’08.

Maintaining forecast. We maintain our FY08 and FY09 earnings forecast at RM22.2m and RM26.8m respectively. The Group’s balance sheet is healthy with net gearing of less than 0.1x.

Maintain BUY. We have rolled over our valuation to FY09 and arrived at a target price of RM1.57 by applying a composite of 7x PER over FY09 EPS of 22.4 sen and 1.5x P/BV. The share is currently tradingat at an undemanding forward PE of 5x and 4.1x for FY08 and FY09 respectively. We maintain our BUY recommendation on STC.