Success- slowly but surely?

Background

Success Transformer Corp Bhd ('Success') is involved in in the manufacture and sale of electrical apparatus and industrial lighting; the production and sale of metal products (focusing on metal stamping parts and metal casings); manufacture and fabrication of process equipment (such as unfired pressure vessels, heat exchangers, tanks, and silos) & other machinery and parts (including mechanical works, maintenance services, and shutdown works); and hiring and servicing of machinery equipment.

New Corporate Development

In late February, Bursa Securities had approved the listing Seremban Engineering Berhad (formerly known as Seremban Engineering Sdn Bhd) ('SEB')on the Industrial Products sector of the Main Market of Bursa Securities. The wholly-owned SEB was acquired for a sum of RM36.408 million, with the first tranche of 60% acquired for RM14.628 million in December 2006 & the second tranche of 40% acquired at RM21.780 million in April 2008. I have appended below the track record of SEB from 2003-2007. For 2007, SEB recorded a net profit of RM6.3 million on the back of a turnover of RM53 million.


Table 1: SEB's financial results from 2003 to 2007

The listing of SEB is likely to include an offer for sale to the shareholders of Success. The exact ratio of SEB shares to be offered to Success's shareholders has not announced yet. The prospectus for SEB IPO has yet to be uploaded onto Bursa's website. Nevertheless, this 'carrot' may be just the catalyst needed for a play in Success.

Recent Financial results

Success has recently announced its results for FYE31/12/2009. For 4Q2009, its net profit increased by 4.4% q-o-q or 20.5% y-o-y to RM6.5 million while turnover increased by 10.3% q-o-q or 25.5% y-o-y to RM52.8 million.


Table 2: Success's 8 quarterly results


Chart 1: Success's 11 quarterly results

Valuation

Success (closed at RM1.21 yesterday) is now trading at a PER of 5.6 times (based on FY2009 EPS of 21.5 sen). At this multiple, Success is deemed fairly attractive. If you valued Success at a PER of 8 times, its fair value is about RM1.72.

Technical Outlook

Success is rising in a gradual uptrend, guided by 50 & 100-day SMA lines. The support given by these SMA lines is around RM1.20. Its immediate horizontal resistance is at RM1.35.


Chart 2: Success's daily chart as at Mar 2, 2010 (Source: Quickcharts)

Conclusion

Based on good financial performance, attractive valuation, positive technical outlook & upcoming listing of its subsidiary (SEB), Success is a good stock for a medium-term investment.