Attaining local accreditation an advantage for Success Transformer

TheEdge Fri, Sep 13, 2019 09:46am - 1 year ago

Success Transformer Corp Bhd
(Sept 12, 99 sen)
Maintain add with a higher target price (TP) of RM1.45 from RM1.39 previously:
Success Transformer Corp Bhd (STC) has stated that it has witnessed an increase in demand for light-emitting diode (LED) street lighting, especially from government-related projects. This translated into more tenders being rolled out as well as more enquiries and roadshows being organised, in line with the government’s ongoing push to adopt LED street lighting for all new street lighting installations and to replace all existing conventional street lighting. Based on our estimates, we believe the replacement market in Peninsular Malaysia alone could see 1.3 million street lighting sticks.

STC’s local sales of street lighting were limited to small private contracts. This is set to change with STC’s attainment of necessary local accreditation in 2019 in order to participate in government tenders. We also believe STC has an advantage over its peers as it is a full-fledged local manufacturer. Note that the bulk of STC’s lighting products have “Made in Malaysia” accreditation, which certifies that these products are designed and manufactured locally. This is a positive, given the government’s push for greater adoption of locally made products under the Buy Malaysian Products campaign.

We are positive on STC’s disposal of its 65.3% stake in Seremban Engineering Bhd (SEB; “non-rated”) for RM26 million or 50 sen a share because: i) SEB has been loss-making in recent years, with a financial year 2019 (FY19) core net loss of RM4.7 million; ii) with a net debt of RM31.4 million as of FY19, SEB was a drag on STC’s balance sheet; and iii) STC can now focus more on industrial lighting. Upon this disposal, we estimate that STC will have a net cash position of RM79 million (including disposal proceeds and shareholder loans to SEB). We think this allows for room to declare a special dividend to reward shareholders on top of an interim dividend, providing an upside to our dividend forecast of four sen a share for FY19.

We maintain our “add” call, with a higher TP of RM1.45. We lift our FY20 to FY22 earnings per share forecasts by 2% to 4.6% to account for higher interest income and the disposal of its stake in SEB. Accordingly, Our TP is raised to RM1.45, still based on 12 times forecast calendar year 2020 price-earnings ratio, in line with its five-year historical mean. — CGS-CIMB Research, Sept 12

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