Success Transformer Group- 1Q09- A good beginning

Price: RM0.81

Target Price: RM1.18

Recommendation: BUY



· Good start to the year. 1Q09 revenue of RM45.5m came in at 23.3% of our forecast while net profit of RM6.1m was 25.7%. Sustained demand for its lightings and transformers together with a continuous run-down of its process equipment order book had helped to underpin the good set of numbers.

· QoQ, revenue was up 8.2%, underpinned by a 102% jump in contribution from process equipment, mitigated by a 17.5% dip in the traditional transformer and lighting division. The jump in process equipment was driven mainly by higher job completion during the quarter while the slight dip in transformer and lighting division was mainly due to seasonal.

· YoY, revenue was up 6.6% while net profit grew a stronger 20.5% mainly due to the lower minority interest as the process equipment subsidiary – Seremban Engineering became fully owned compared with 60% stake previously.

· Margins continued to improve. For the quarter, pretax margin was up 29 basis points to 17.8% driven mainly by rising economies of scale from the new floor space (Factory 5 at Seremban Engineering) as well as better product mix.

· Outlook remained cautious for the time being. Management continues to adopt a cautious stance for the near term given the lingering uncertainties still. Order book for the process equipment division remained at a steady RM38m which should help to sustain another 6 months of activity. Tender book is running at circa RM60m but strike rate should be lower given a more competitive landscape ahead. Comforting to note that one of the division’s major clients which is a leading food & beverage group in the world will be upping their capital expenditure in the current year by some 70% to RM320m. This can only be beneficial.

· Transformer and lighting division should continue to perform in line with the general construction sector which is expected to gain more traction on the back of the stimulus that had been announced by the government since the start of the crisis. Meanwhile, operation in China under 60% owned Ningbo Success which undertakes design and manufacturing of light fixtures have integrated well to the group. More importantly, the products from its China operation have been able to meet the Group’s stringent quality requirements.

· Forecast and BUY recommendation is maintained. Proven execution and growing dominance in the transformer and lighting space are some of our key affinities for the group. Trading at an undemanding 4.1x FY09F, our target price of RM1.18 based on 6x FY09F is maintained.