This article first appeared in The Edge Malaysia Weekly, on November 2 - November 8, 2015.
SHAREHOLDERS of Success Transformer Corp Bhd and Seremban Engineering Bhd have good reason to be happy, following a recent rally in the share prices of the two companies.
STC is one of the largest low-voltage transformer and industrial lighting manufacturers in the country and holds a 65% stake in the loss-making SEB, a Negeri Sembilan-based process equipment manufacturer.
STC is essentially controlled by the Tan family of Penang while SEB was, until recently, managed by its founders, the Wong family of Seremban.
Last Tuesday, SEB (fundamental: 0.15; valuation: 0.90) received an unusual market activity query from Bursa Malaysia after its share price hit limit up, soaring 65.2% to a 52-week high of 76 sen. Within a day, the company saw its market capitalisation skyrocket from RM36.6 million to RM60.6 million.
SEB was picked by The Edge Research as a stock with momentum last Thursday but due to its weak fundamentals, the counter has been “red flagged” and investors are advised to be cautious about trading in it.
The share price of STC has also been on an upward trend, gaining more than 60% in less than three weeks. Last Wednesday, the stock hit an all-time high of RM2.17 and at its close of RM2.09 on Thursday, the company had a market capitalisation of RM240.9 million.
Not many would be aware that the surge in STC came after the Wong family ceased to be a substantial shareholder of the company in mid-October. According to theedgemarkets.com, the likelihood of a corporate exercise at STC (fundamental: 1; valuation: 1.80) is high.
In fact, the Wong family’s vehicle Wtech Holdings Sdn Bhd was still listed as the second-largest shareholder of STC with a 13.98% stake as at April 30. But it has now largely exited the company, after disposing of 5.11 million STC shares or a 4.4% stake at RM1.47 apiece on the open market on Oct 16.
Market observers say STC has been under selling pressure since July as the Wong family dumped their shares. “STC’s share price has now begun to gain momentum, after they [the Wong family] exited the company,” a corporate observer tells The Edge.
Omega Attraction Sdn Bhd, a private vehicle of the Tan family, remains the single largest shareholder of STC with a 42.39% stake. STC group managing director Tan Ah Ping, his wife Pan Kim Foon and daughter Tan Chung Ling are listed as substantial shareholders of the company.
To recap, STC ventured into process equipment manufacturing in 2007 by acquiring SEB from Danny Wong Choon Cheon, his daughter Penny Wong Poh Chee and his son Peter Wong Chee Kian. Between end-2006 and 2008, STC paid the vendors a total of RM36.41 million cash.
But it seems the Wong family could not let go of SEB, a company founded by Danny’s father. Wtech Holdings surfaced as a substantial shareholder of STC in August 2008 and it continued to mop up the shares on the open market. In other words, the Wong family had interest in SEB again via STC.
Basically, SEB remained a family concern for the Wongs even after it was purchased by STC and the Tan family seemed comfortable with it. Through the years, Peter served as SEB’s managing director, Penny as its executive director and their father Danny as non-executive director.
In 2010, STC reduced its shareholding in SEB to 65% pursuant to the latter’s listing on the local stock exchange.
Fast forward to July and August, and SEB was thrust into the limelight following the retirement of Danny and the resignations of Penny and Peter. On July 9, the company hired professional manager Chuah Cheong Jin as its new CEO.
The Wong family then sold off its entire stake in STC, bidding farewell to the Tan family. Since then, the only obvious connection between the two families is the fact that Penny is still a non-executive director of STC.
The departure of the Wong family from STC raises the question of whether the Tan family is still keen on SEB’s business — the fabrication of process equipment, such as unfired pressure vessels, reactors, heat exchangers, storage tanks and silos.
The Edge Financial Daily reported last Wednesday that STC was looking to sell its entire 65% stake in SEB. However, both companies denied the news.
SEB was contributing about 20% to 30% to STC’s bottom line over the years but this changed after its Sabah Ammonia Urea (SAMUR) project saw a cost overrun last year. In its financial year ended Dec 31, 2014 (FY2014), SEB reported a net loss of RM5.75 million, compared with a net profit of RM6.27 million a year ago. The company continued to bleed in the first half ended June 30 (1HFY2015), registering a net loss of RM5.97 million.
The poor performance of SEB dampened the financial results of STC, which reported a lower net profit of RM24.44 million in FY2014, compared with RM28.93 million a year earlier, representing a drop of 15.5%.
An industry source notes that there is no crack between the Tan and Wong families, although STC’s financial performance has been dragged down by SEB’s losses.
“Of course, they [the two families] are not happy that this [cost overrun in the SAMUR project] happened, but I would say their relationship is still cordial. There is no finger pointing, everyone wants to work out a solution,” he says.
In its 2014 annual report, SEB said the company had set up an independent enquiry to determine the causes of the cost overrun affecting the SAMUR project with the view to undertake appropriate remedial action.
“The lessons learnt at SAMUR have enabled us to be more cautious and prudent in bidding for a number of packages in the Refinery and Petrochemical Integrated Development project and other associated facilities in Pengerang, south of Johor,” it added.
In the oil and gas sector, the company still sees opportunities for the maintenance and upkeep of plants despite major oil companies scaling back capital expenditure and temporarily reducing production activities.
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