We are upbeat on SUCCESS for its sound fundamentals, experienced and hands-on (with an operational track record of ~40 years) management, positive outlook in line with the government’s ongoing push to adopt LED street lightings as well as achieving greater economies of scales and productivity after SEB’s disposal. Valuation is undemanding at 8.7x FY20E (ex-cash P/E only at 5.9x), -28.7% lower than 5Y historical average of 12.2x), supported by decent 4.4% DY and strong 22% FY20-22 EPS CAGR coupled with net cash position of RM72m (29sen/share or 32% to share price). Technically, Success is ripe for an oversold rebound towards RM0.99-1.10 levels after a brief sideways consolidation.

Powering on its transformer and lighting segment. SUCCESS is involved in manufacturing power transformers and electrical apparatus products such as automatic voltage stabilizers, detuned harmonic circuit filter reactor, battery chargers and testers. SUCCESS’s portfolio includes LED range of industrial lighting products such as floodlights, streetlights, highbays and HID lighting. It has diversified into the process equipment segment through the acquisition of Seremban Engineering Bhd (SEB) in Mar 2007. Through its manufacturing plants in Malaysia and China, the Group exports its products to over 40 countries (from about 25 countries in 2005) by diversifying their geographical footprint (by fortifying its global supply chain with the support from distributors across the globe) and offering robust, versatile and reliable energy efficient products range to keep with the ever changing consumer needs and creating added value for social and environmental benefits. In FY19, the local and exports markets (with significant presence in Southeast Asia, Africa, Middle East and Southern America) contributed 50% each to the topline.

Positive on disposal of low-margin process equipment business in SEB. On 3 September 2019, SUCCESS disposed its entire 65% stake in SEB to MIE Industrial Sdn Bhd for RM26m. We are positive on the deal as the disposal represents an opportunity for Success to monetise its investment in SEB at a reasonable price and exit from the loss making company (FY14-19 net losses RM46m). In addition, the proceeds from the disposal will strengthen the group’s financials and re-divert its resources to focus on the growth of its transformer and industrial lighting businesses to maximize production yield and increasing profitability.

Ripe for a technical rebound. After hitting 52W high of RM1.12 (24 Apr), SUCCESS plunged 36% to a low of RM0.715 (3 June). However, the stock managed to consolidate upwards by establishing higher lows patterns before ending at RM0.915 on 10 Jan, marginally above 200D SMA (RM0.905). As techicals are on the mend, the stock is poised for an oversold rebound soon. A successful breakout above RM0.95 (100D SMA or downtrend line) could potentially lift prices towards RM0.99 (38.2% FR) before reaching our LT target at RM1.10 (9 Dec high). Supports are pegged at RM0.90 and RM0.875 (76.4% FR). Cut loss at RM0.85.

Source: Hong Leong Investment Bank Research - 13 Jan 2020