Success - BUY - 19 Aug 2008

Success Transformer Group - Record quarter! (Results Note)



Price: RM0.905

Target Price: RM1.43

Recommendation: BUY



· Record setting quarter had helped to underpin a sterling first half. 6M08 topline of RM91.3m was 52% of our full year's while net of RM11.6m came in at a strong 59%. Continuing strong demand for transformers and industrial lighting equipment as well as a booming process equipment division had helped to sustain the strong set of numbers.

· QoQ, topline was up 14.1% driven by a 19.3% improvement in its traditional transformer and industrial lighting division while process equipment was up by 6%. Net profit meanwhile jumped 30.3% as a result of better margins fetched by the process equipment division at 15.2% (1Q08 : 9.8%) while transformer and industrial lighting was maintained at 16.1% (1Q08 : 15.9%).

· YoY, revenue was up 22.7% while net profit grew even stronger at 31.7%. All the relevant divisions had continued to perform well on the back of improved demand for the group's key products and services.

· Prospects remained bright for the group as demand for its key products and services have stayed buoyant despite the headwinds posed by a more challenging macroeconomic condition. Order book for the process equipment division is maintained at RM35m which should last at least 6 months while tender in excess of RM45m should yield an additional RM9m to RM13m based on historical strike rate of 20% - 30%.

· Seremban's 5th factory is on course for completion by end 2008, adding an additional 20% fabrication capacity while 6th is already on the drawing board. Meanwhile, the Chinese joint venture under 60% owned Ningbo Success Zhenye Luminaire Ltd (Ningbo) is slated to kick-start production beginning Sep 2008. Recall that the group had entered into this joint venture in May 2008 to design and manufacture light fixtures and fittings as part of its plan to enhance quality and improve efficiencies. The venture comes with a profit guarantee of RMB 7m over a 24-month period starting Sep 2008.

· Forecast and BUY recommendation is maintained. Our likes include management's strong execution track record and capability, rising prospects for its key divisions as well as the undemanding valuation of 5.4x based on our conservative FY08F. Target price of RM1.43 based on 8.5x FY08F is just, offering upside of 58% from the current levels.