This article first appeared in The Edge Financial Daily on April 9, 2019
Sunway Bhd
(April 8, RM1.70)
Maintain buy with an unchanged target price (TP) of RM2.18: Sunway Bhd entered into a special service agreement to acquire 100% of the total issued and paid-up share capital of Blacktop Industries Sdn Bhd (BISB) for RM70.1 million.
BISB holds 50% equity interest in both Blacktop Lanchang Sdn Bhd and Can Technical Services Sdn Bhd as well as 49% equity interest in TKM Sdn Bhd. BISB and its associated companies are primarily in quarry business that is operating premix plants, producing and marketing aggregates and bituminous premix, similar to Sunway’s quarry operations.
We are positive on the news as we expect Sunway’s efforts in expanding its quarry business to be rewarding in the longer term.
The acquisition will increase the total number of quarries under Sunway’s operations to eight (from six) and premix plants to 22 (from 13). The quarry business used to be Sunway’s forte before the quarries were sold to Hanson back in the late 1990s. We understand that the quarry business will be a new pillar of growth moving forward, further establishing Sunway as a successful conglomerate.
The indicative purchase consideration of RM70.1 million was derived based on an adjusted net asset value of BISB’s financial year 2018 (FY18) financial statements, representing an approximate 24% discount to the company’s net assets. We believe the discount received is likely to be attributed to the vendors wanting to exit the subdued quarry business. The margins of quarry businesses have fallen over the past years from mid-teens to a low single-digit profit before tax (PBT) margin in FY18.
The proposed acquisition will be carried out in two tranches that is the first tranche (RM42.1 million) for 60% equity interest is expected to be completed by mid-2019 while the second tranche (RM28 million) for the remaining 40% is expected to be completed by mid-2020.
Our pro forma calculation implies that FY19’s net gearing will increase to 0.42 times (x) from 0.41x post-acquisition, which is still below Sunway’s threshold of 0.5x.
As of FY18 (FYE April), BISB registered a PBT of RM6.9 million, with margins similar to Sunway’s.
We expect about RM1 million/RM3 million to filter into FY19/FY20, which represents only 0.2%/0.4% of our earnings forecast. Nonetheless, we believe the business will contribute better, in the longer term, once the industry picks up.
We maintain an unchanged forecast pending further clarity from management on the long-term prospects of the business. The contributions are expected to be minimal at this juncture.
We maintain “buy” with an unchanged TP of RM2.18 based on a 10% holding discount from sum of parts-derived valuation of RM2.42.
We continue to like its resilient integrated real estate business model and earnings growth prospects with mature investment properties and under-appreciated trading and healthcare businesses despite the down cycle of both property development and construction sectors. — Hong Leong Investment Bank Research, April 1