Success Transformer seen to gain from govt’s street light replacement exercise

TheEdge Wed, Jun 19, 2019 10:07am - 4 years View Original


Success Transformer Corp Bhd
(June 18, 92 sen)
Maintain add with an unchanged target price (TP) of RM1.39:
Success Transformer Corp Bhd’s (STC) revenue declined 10.1% quarter-on-quarter (q-o-q) and core net profit fell 31.7% q-o-q in the third quarter of financial year 2019 (3QFY19). STC attributed its weak 3QFY19 results to Chinese New Year festivities during the quarter, the completion of low-margin contracts for 65%-owned subsidiary Seremban Engineering Bhd (SEB) and lower transformer sales captured.

STC is confident of recording sequentially stronger results. This is backed by more potential street lighting contracts especially in the local market, SEB’s order book picking up with higher-margin projects, and ongoing cost-cutting including reducing the workforce, particularly for SEB.

STC shared our view that the Malaysian government is ramping up its efforts to replace street lights nationwide with light-emitting diodes (LED). This is due to a recent rise in government tenders for LED street lighting, and more invitations to participate in smart-city projects locally. STC is confident of capitalising on these orders, given it is qualified as a full local manufacturer and having obtained all accreditations required.

STC expects to secure more overseas orders for street lighting products, especially from key markets such as Vietnam and Indonesia. It is also confident of securing more street lighting orders after recently completing trial projects for Trimax and ILCS — STC’s flagship street lighting products — in Germany and Singapore.

STC believes all SEB’s low-margin projects were largely completed in 3QFY19. It aims to focus on more niche projects, especially in the palm oil segment. We gathered these projects have higher margins and a better cost control versus existing large-scale fabrication projects. We expect loss-making SEB to break even in FY20.

Our TP is based on 12 times calendar year 2020 price-earnings, in line with its three-year historical mean of 11.6 times. Potential rerating catalysts are higher street lighting sales and strong profits from SEB. The share price is supported by 5% dividend yields in FY19 to FY21 forecasts. Downside risks are a delay in public tenders for LED lights and bigger losses from SEB. — CGSCIMB Research, June 17

The content is a snapshot from Publisher. Refer to the original content for accurate info. Contact us for any changes.






Related Stocks

SEB 0.640
SUCCESS 0.725

Comments

Login to comment.