Trading Ideas: Success Transformer Corporation (7207)

mrinvestor12

Publish date: Sat, 04 Nov 2017, 02:45 PM

Success Transformer is a company that I have been monitoring for some time. I previously made some money investing in it, and thought it would be a good idea to revisit this company now. It is involved with the industrial lighting and electric transformer manufacturing business. It has a listed subsidiary, Seremban Engineering Berhad (5163), which is involved with the process engineering industry.

Its share price has been consolidating for some time, and I think there may be opportunities to invest in this company.

Chart 1: Success Transformer Corp share price

From 2014 until 2016, Success' process equipment division was hit by cost overruns on certain projects which resulted in it reporting losses. Looking at its price chart, its share price has not progressed much from 2014 - 2016. Post financial year 2016, business operations seemed much better. It appears that its process engineering division has since gotten out of the red and is now reporting profits. Even the profit margins of its process equipment division in 2017 are back to its pre-2014 profit margins of 10%. Refer Chart 2 below:

Chart 2: Financial Results of Success Transformer Corporation

Note the change in financial year end from 31 December to 30 June. Hence, for financial year ended 30 June 2016, the results were for 18 months.

Hopefully, after leaving its loss making ventures behind, this company can continue to make sustained profits. A noteworthy point is that despite its process equipment division recording losses in 2014 and 2016, it still managed to record a net profit as the losses were cushioned by its transformer and lighting division. It was noted that the profit margins for its transformer and lighting division were consistently above 20%.

Chart 3: Technical Chart of Success Transformer

The share price of Success has been consolidating for almost 6 months since May 2017. Its share price reached a high of RM 4.26 in May 8, 2017, before retreating to RM 3.37 in Nov 3, 2017.

Probably there will be more consolidation ahead. Judging from its price action, there are no clear indications that price consolidation may be ending. There is just a lack of momentum in its share price. However, I noticed that there are some accumulation going on when prices trade close to support at RM 3.22; this was evident in the spike in volume -- refer Chart 3 above.

Below are the key support / resistance levels for Success:
Support:
S1: RM 3.22
S2: RM 3.00
S3: RM 2.80

Resistance:
R1: RM 3.60
R2: RM 4.17

Risks
Low trading volume.
Bearish market sentiment.

Market sentiment is still as bearish as ever. Despite the announcement of the 2018 Budget, the market is still anaemic.

Refer to my article on market sentiment HERE.

Final thoughts
In light of the improvement in its process equipment division, Success Transformer should be poised to trade higher. Its EPS for financial year ended was its highest in 6 financial year ends, 40 cents -- see Chart 2 above.

Note: This is not a recommendation to buy or sell this stock. The writer does not own shares in this company. The writer intends to share his view point on this stock's potential investment value, any decision to invest or sell shares in this company is entirely at the reader's own risk.

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