CGS-CIMB Research

Success Transformer Corp - Robust demand to drive FY23F earnings

sectoranalyst
Publish date: Tue, 30 Aug 2022, 11:03 AM
CGS-CIMB Research
  • FY6/22 net profit of RM20.9m (+5.8% yoy) was below our expectations due to weaker-than-expected local sales (-1.2% yoy) in 4QFY22.
  • We continue to expect STC’s sales to be driven by higher demand for LED industrial lighting, due to its functional advantages and lower energy usage.
  • We retain our Add call with a higher TP of RM1.21, backed by strong net cash position (32.2sen/share) and solid dividend yields (4.1% for FY23-25F).

FY6/22 core net profit rose 5.8% yoy; below expectations

4QFY6/22 core net profit came in at RM6.3m (+66.3% yoy), after accounting for a one-off loss of RM0.3m (mainly impairment losses on trade receivables). This brought FY6/22 core net profit to RM20.9m (+5.8% yoy). This was below expectations at 95% of our FY22F estimate. The earnings miss in 4QFY22 was due to weaker-than-expected local sales (-1.2% yoy/-5.3 qoq). No dividend was declared in the quarter, below our expectations (total DPS cumulatively at 1.8 sen with payout ratio of 19.7% in FY22).

4QFY22: Strong recovery in export sales to offset lower local sales

Revenue rose 3.3% qoq and net profit climbed 24% qoq in 4QFY22 due to i) higher sales from overseas markets (+12.6% qoq, 52.5% of 4QFY22 revenue) to offset lower local sales (-5.3% qoq), and ii) weaker ringgit to increase pricing competitiveness. FY22 sales (-2.4% yoy) were impacted by lower local sales (-9.1% yoy), due to movement restrictions which dampened business activities. As a result, FY22 EBITDA/PBT declined by 2.5%/3.7% yoy.

Strong demand for LED industrial lighting to drive FY23F earnings

We expect earnings growth of 5.9% yoy in FY23F given rising demand for LED-based industrial lighting on a global scale. We estimate smart lighting and LED-based lighting products contributed 52% of STC’s FY22 revenue. This is given LED lighting’s functional advantages (smart lighting and better brightness) and lower energy usage (decline in carbon emissions) vs. conventional industrial lighting. With growing importance of ESG compliance, we think that more companies would emphasise lowering carbon emissions, leading to wider usage of LED-based lighting products.

Backed by strong net cash position (43.5% of its market cap)

STC now trades at only 45.4% of net tangible asset of RM1.63/share. It has a net cash position of RM74.8m (32.2sen/share) at end-FY22, i.e. 43.5% of market cap. We expect its strong net cash position to underpin its ability to pay dividends. We estimate a conservative 3 sen DPS in FY23-25F, i.e. dividend payout ratio of 26-30%.

Retain Add with a higher TP of RM1.21

We lift our FY23-24F EPS on housekeeping matters and introduce FY25 estimates. Our higher TP of RM1.21 (still based on 12x CY23F P/E, 5-year historical mean) accounts for a recovery in local sales volume. We like STC for: i) LED industrial lighting market leadership in Malaysia (in terms of sales and technology), ii) robust net cash position, and iii) attractive dividend yields (FY23-25F: 4.1%).

Source: CGS-CIMB Research - 30 Aug 2022

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