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.

Kuala Lumpur Kepong - 1HFY08 net profit well in-line (Results Note)

Success Transformer Group - In line with expectations (Results Note)



Price: RM1.03

Target Price: RM1.43

Recommendation: BUY



· 1Q08 results continue to trend in line with expectations underpinned by commendable showings across all divisions. Reported revenue of RM42.6m is some 24.3% of our full year's forecast while net profit of RM5.1m is higher at 25.5%.

· QoQ, revenue was 3.5% lower seasonally given the lesser number of workdays during the quarter. On a divisional basis, the transformer and lighting division saw revenue dipping 4.7% while process equipment was lower by 1.5%. At the net, profit was lower by 5.6%.

· YoY, 1Q08 revenue surged 65.5% underpinned by strong growth from all the key divisions. While the transformer and lighting division grew 30.9%, the process equipment division under Seremban Engineering registered growth of 179.5% underpinned by continuous strong demand and a mere single month contribution in 1Q07.

· Margins continue to trend above our forecast. Despite a challenging environment of higher input costs and adverse currency effect, group continues to show stable margins without the need for any price revision during the quarter. A well hedged inventory of raw materials and a never ending efficiency drive had helped to cushion profitability. Going forward, some price adjustment will be inevitable with management confident that historical margins can be sustained.

· Forecast and Buy recommendation is maintained. We continue to like the company for its low valuation and strong growth prospects for all its divisions. Trading at a mere 6.2x current year, we rate it a BUY at RM1.43 based on 8.5x FY08. A 3 sen tax-exempt interim payable in July or a yield of 2.9% should be an added incentive.





KENANGA INVESTMENT BANK BERHAD (15678-H)

Success Transformer Corp - BUY - 16 May 2008

Success Transformer Corp - Moving upstream with China JV (Company Update)



Price: RM1.10

Target Price: RM1.43

Recommendation: BUY



· Success announced that it is setting up a joint venture with Ninghai Zhenye Luminaries Manufacturing Co. Ltd (Zhenye) of China to jointly design and manufacture industrial lighting fixtures in China under a new company - Ningbo Success Zhenye Luminaries Limited Liabilities Company (JV Co) with Success taking a 60% stake with the remainder by Zhenye. The JV company will be incorporated in Zhejiang Province with an initial capital of RMB10m or RM4.7m.

· Zhenye has its core competencies in design, manufacturing and customization of aluminium die cast lighting fixtures and fittings. With a solid 15 years track record, the company has also an established network of customers including multi-nationals.

· Fast track. To reduce gestation, the JV will be assuming the existing production facility of Zhenye with all the established infrastructures while the vendor - Mr. Gu Zhenwu which holds the remaining 40% of the JV will assume the post of Chief Executive Officer.

· Moving up the value chain. By doing so, Success is not only able to control the costing but also leverage upon the network of customers many of which are MNCs via the new JV. In fact, Success has been a customer of Zhenye for their industrial lighting component requirements for the past 7 - 8 years and had become both comfortable and confident with its quality and execution capabilities.

· Success is guaranteed. Profit guarantee of RMB3b for the first 12 months upon incorporation with RMB4m for the subsequent 12 month period will be provided by the vendor.

· Investment is undemanding. With a mere RMB10m (RM4.7m) investment, profit guarantee of RM7m profit guarantee for the two years will reduce risk, if any, substantially.

· Growing confidence after fruitful venture into process equipment. The company is shedding its conservative image and moving aggressively to grow its business via the M&A route. The successful acquisition of Seremban Engineering had paved the way for more of such deals to augment its growth prospect. Amazing still is the ability of top management to seek out such M&A prospects which the market has yet to price in.

· Forecast and recommendation is maintained. Before we are able to fully assess the prospects of the above deal, we are therefore maintaining our forecast and recommendation with a positive bias. A long ignored gem of a company which is trading at a lowly 6.6x current year's earnings despite the bright outlook for all its key businesses. A capable management team that is turning increasingly aggressive in the M&A space should we believe not be taken lightly by investors. Our target price of RM1.43 based on 8.3x 2008F is conservative we believe.





KENANGA INVESTMENT BANK BERHAD (15678-H)