News

• Sunway Holdings (SunHoldings) announced that it have entered into a share sale agreement (SSA) with Winstar Vendors for the acquisition of Winstar Trading Sdn Bhd (100% stake) for RM130.96m.

• SunHoldings also entered into a SSA with PND Vendors for the acquisition of PND Hardware & Trading Pte Ltd (100% stake) for SG$2.57m (approximately RM6.93m).

• Payment for both acquisitions are staggered into three payments (FY15-18), of which 60% is paid by 2QFY15 and the remaining 40% is paid evenly in 2QFY17 and 2QFY18, respectively.

• Separately, the group also announced the acquisition of the land and petrol station equipment, for RM1.75m.

Highlights

• We are surprised with the announced acquisition with a neutral to slight positive view as these two vendors are profitable market leaders with more than 30 years of experience in the wholesaling of hardware market.

• These acquisitions would eventually create additional revenue stream, providing diversification of risks for the group, albeit marginally (less than 1% of group’s PATAMI).

• There will be a profit (PAT) guarantee of RM15m and SG$250k (approximately RM680k) annually for three years (FY15-17) from Winstar and PND respectively.

• Based on the profit guarantee, Winstar and PND are both valued at a P/E of 8.7x and 10.3x, respectively, which are still priced below the group’s P/E which are currently trading at 11.6x FY15 EPS.

• We believe these acquisitions will allow Sunway to enjoy synergies from cross-selling across the customer base of all parties. Apart from that, there could also be potential cost - savings resulted from economies of scale.

• Net gearing wise, these acquisitions would marginally increase the group’s net gearing from 0.30x to 0.32x.

Risks

• Execution risk;
• Regulatory and political risk (both domestic and overseas);
• Rising raw material prices; and
• Unexpected downturn in the construction and property cycle.

Forecasts

• Unchanged, pending further information on the acquisitions.

Rating

HOLD

• We remain optimistic about the group, especially with the proposed listing of SunCon as it would further enhance shareholders’ value.

Valuation

TP remained unchanged at RM3.75 based on SOP valuations. As share price have appreciated 16.4% since our last upgrade to buy in Nov 2014 and potential upside is now less than 10%, we downgrade our recommendation to HOLD.

Source: Hong Leong Investment Bank Research - 10 Apr 2015