Investment highlights

• We downgrade Sunway Bhd (Sunway) to HOLD from BUY following the recent run-up in its share price, which now offers limited upside. Our fair value is unchanged at RM1.73 based on SOP valuation (Exhibit 1). We made no changes to our FY19-21 earnings forecasts.

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

• The acquisition price of RM70.1mil is derived based on an adjusted NAV of BISB as per BISB’s audited financial statements for the financial year ended 30 April 2018. Management expects the deal to be completed in 2QFY20.

• 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 into new markets. The increased coverage will result in greater cost efficiency through economies of scale.

• Sunway’s quarry division comprises 6 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 acquisition of BISB will add 2 quarries and 9 asphalt plants to Sunway.

• 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.

Source: AmInvest Research - 1 Apr 2019