This article first appeared in The Edge Financial Daily on April 2, 2019

Sunway Bhd
(April 1 RM1.69)
Downgrade to hold (previously buy) with an unchanged fair value (FV) of RM1.73: We downgrade Sunway Bhd to “hold” from “buy” following the recent run-up in its share price, which now offers limited upside.

Our FV is unchanged at RM1.73 based on sum-of-parts valuation. We made no changes to our financial year 2019-2021 (FY19-21) earnings forecasts.

Sunway has proposed to acquire a 100% stake in Blacktop Industries SB (BISB) for RM70.1 million, which will allow the group’s quarry division to penetrate new markets with a wider market coverage and additional capacity.

The acquisition price is based on an adjusted net asset value of BISB as per its audited financial statements for financial year ended April 30, 2018.

The management expects the deal to be completed in the second quarter of financial year 2020.

The proposed acquisition will improve both the market share and financial performance of Sunway’s quarry division with an expanded market coverage as it penetrates new markets. The increased coverage will result in greater cost efficiency through economies of scale.

Sunway’s quarry division comprises six quarries and 13 asphalt plants in Peninsular Malaysia. It contributed 4.1% and 1.3% to the group’s revenue and net profit in FY18 respectively.

The BISB acquisition will add two quarries and nine asphalt plants.

We believe the small contribution from the quarry division will not have any significant impact on Sunway’s earnings but BISB will still contribute positively to its future earnings. Hence, we made no changes to our FY19-21 earnings forecast until we obtain more information from the management. — AmInvestment Bank, April 1