CIMB Research sees stronger earnings for Success Transformer


Success Transformer Corp's LED street lights.

KUALA LUMPUR: CIMB Equities Research maintains its positive outlook on Success Transformer Corporation (STC) as it expects stronger earnings prospects ahead, mainly supported by roll out of street lighting projects locally.

It said on Tuesday it also expects its 65%-owned Seremban Engineering Bhd to break even in FY20F. 

“We reiterate our positive view on STC after a recent meeting with the company. We sense that quarterly earnings may have bottomed in 3QFY19. Maintain Add. Our TP of RM1.39 is based on 12 times CY20F P/E,” it said.

To recap, STC’s revenue declined 10.1% quarter-on-quarter and core net profit fell 31.7% quarter-on-quarter in 3Q19. 

STC attributed its weak 3Q19 results to: i) seasonality, i.e. Chinese New Year festivities during the quarter, ii) completion of low-margin contracts for SEB, and iii) lower transformer sales captured.

“STC is confident of recording sequentially stronger results. This is backed by: i) more potential street lighting contracts, especially in the local market; ii) SEB’s order book picking up with higher-margin projects; and iii) ongoing cost cutting exercise including reduction of workforce, particularly for SEB,” it said.

CIMB Research said STC shares its view that the Malaysian government is ramping up its efforts to replace street lights nationwide with light-emitting diodes (LED). 

This is due to the 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 that it is qualified as a full local manufacturer and has obtained all required accreditations.

“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 post completion of trial projects for Trimax and ILCS recently (STC’s flagship street lighting products) in Germany and Singapore,” it said.

CIMB Research said STC believes that all SEB’s low-margin projects have largely been completed in 3QFY19.

“It aims to focus on more niche projects, especially in the palm oil segment. We gather that these projects have higher margins and better cost control vs. existing large-scale fabrication projects. We expect loss-making SEB to break even in FY20F,” it said.
 

   

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