STC seen as attractive proposition due to its current valuations

PETALING JAYA: The near-term outlook for electronics maker Success Transformer Corp (STC) Bhd is dim but the company is an attractive proposition because of its current valuations, relatively strong net cash position and possible re-rating catalysts.

CGS-CIMB said this in a report, noting that STC’S latest third quarter’s reported core net profit came in at Rm1.4mil (-75.4% year-on-year +359% quarter-on-quarter) after accounting for one-off losses of Rm4.6mil.

“The weaker-than-expected 3QFY2020 results were due to weaker-than-expected domestic and export sales of LED lighting and transformers, given the global economic uncertainties and implementation of the movement control order (MCO),” said the research outfit.

It said it expected the company to record even weaker profits in the coming quarter as the full impact of the MCO is felt.

“While STC recommenced operations from May onwards (post-execution of the conditional MCO), domestic sales may remain slow in the near term due to the economic slowdown and sluggish construction activities.

“In addition, we gather that STC is expecting export sales to remain weak in the near term, with Covid-19 lockdowns affecting several of its key export markets.”

Consequently, the research outfit has lowered its FY2020-FY2022 earnings per share (EPS) by 20%-51.4% to account for a decline in domestic and export sales, and lower economies of scale.

That said, CGS-CIMB said it believed that STC remains an attractive proposition due to its attractive valuation of 8.9 times forward price to earnings ratio, which is a 32% discount to its five-year historical mean as well as its net cash position of 33 sen per share.

The potential re-rating catalyst is higher sales of street lights while downside risks include a delay in public tenders for LED lights, and a spike in operating costs, according to CGS-CIMB.

In an earlier note on STC, Hong Leong Investment Bank said it was upbeat on STC for its sound fundamentals, experienced and hands-on management, positive outlook in line with the government’s ongoing push to adopt LED street lightings as well as its greater economies of scales and productivity after the disposal of its unit.

At the close yesterday, STC saw its stock finish 2.5 sen down to 59.5 sen, giving the company a market capitalisation of Rm149mil.

“The weaker-than-expected 3QFY2020 results were due to weaker-than-expected domestic and export sales of LED lighting and transformer.” CGS-CIMB