Sunway entered into a SSA to acquire Blacktop Industries Sdn Bhd for a purchase consideration or RM70.1m, in two tranches. Blacktop Industries is primarily involved in the quarry business, increasing Sunway’s total number of quarries under operations to 8 and premix plants to 22. Our proforma calculation implies that FY19 net gearing will increase to 0.42x (from 0.41x) post acquisition, which is still below Sunway’s threshold of 0.5x. Our forecasts remain unchanged as we expect the initial contributions to be minimal at this juncture. Maintain BUY with an unchanged TP of RM2.18 based on a 10% holding discount from SOP-derived valuation of RM2.42

NEWSBREAK

Sunway entered into a SSA to acquire 100% of total issued and paid-up share capital of Blacktop Industries Sdn Bhd (BISB) for a purchase consideration of RM70.1m. 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 i.e. operating premix plants, producing and marketing aggregates and bituminous premix, similar to Sunway’s quarry operations.

HLIB’s VIEW

Positive on the news. 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 8 (from 6) and premix plants to 22 (from 13). Recall that 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.

Purchase consideration. The indicative purchase consideration of RM70.1m was derived based on an adjusted net asset value of BISB’s 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; note that margins of quarry businesses have fallen over the past years from mid-teens to a low-single digit PBT margin in FY18. The proposed acquisition will be carried out in two tranches i.e. the first tranche (RM42.1m) for 60% equity interest is expected to be completed by mid-2019 while the second tranche (RM28m) for the remaining 40% is expected to be completed by mid-2020.

Net gearing. Our proforma calculation implies that FY19 net gearing will increase to 0.42x (from 0.41x) post acquisition, which is still below Sunway’s threshold of 0.5x.

Earnings contribution. As of FY18 (FYE April), BISB registered a PBT of RM6.9m, with margins similar to Sunway’s. We expect c.RM1m/RM3m 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.

Forecast. Unchanged pending further clarity from management on the long-term prospects of the business. Contributions are expected to be minimal at this juncture.

Maintain BUY with an unchanged TP of RM2.18 based on a 10% holding discount from SOP-derived valuation of RM2.42 (Figure #2). Despite the down cycle of both property development and construction sectors, we continue to like its resilient integrated real estate business model and earnings growth prospect with mature investment properties and underappreciated trading and healthcare businesses.

Source: Hong Leong Investment Bank Research - 8 Apr 2019