News

SUNWAY announced: (i) acquisition of two hardware companies namely Winstar Trading S/B (WINSTAR for RM131.0m) and PND Hardware & Trading Pte. Ltd (PND, for SGD2.6m or c.RM6.8m) for a total consideration of RM138.0m, and (ii) acquisition of 100% equity interest in Pasir Mas Holdings Sdn Bhd (Pasir Mas) for a total cash consideration of RM1.75m.

Comments

We are neutral in the near term but positive in the longer run on the proposed acquisitions which will further enhance SUNWAY’s trading and manufacturing reach in both Malaysia and Singapore given these companies’ long standing track record and network in the market of more than 30 years. The acquisitions will have minimal impact on net gearing as it will be paid in 3 tranches over 4 years. (Kindly refer overleaf for more details).

We deem that the purchase consideration of RM138.0m to be fair considering the annual profit guarantees of some RM15.7m (RM15.0m and SGD0.25m (c.RM0.7m) annually from both WINSTAR and PND, respectively). This would imply a PER of 8.7x which is pretty inline with ours applied PER of 8x for its trading division.

We are also positive with the acquisition of Pasir Mas, which operates a petrol station and motor vehicle workshop for the 0.8ac site which is strategically located right opposite Sunway Pyramid in Bandar Sunway. The land is likely to be earmarked for redevelopment. Assuming 4x plot ratio, 70% utilisation rate and ASP of RM1,000psf (i.e. Sunway Geo 2), the land has a potential GDV of RM97.6m. However, impact to RNAV is minimal.

Outlook

As for the listing of its construction arm SUNCON, we believe that it is right on track to be listed by the end/beginning of 1H15/2H15. To recap, SUNWAY’s shareholders could stand to gain 33.3 sen – 38.9 sen special dividends (inclusive of SUNCON shares) from the listing of SUNCON.

Forecast

We tweaked our FY15-16E core net profit marginally higher by 1% - 2%, after factoring in the potential contribution from acquisition of the two hardware companies. We have not imputed any earnings impact from Pasir Mas yet.

Rating

Maintain OUTPERFORM

Valuation

We reiterate our OUTPERFORM call on SUNWAY with a higher SoP-driven TP of RM3.76 (previously, RM3.74), as we believe that there would be more excitement closer to the listing of its construction arm (SUNCON). Our Target Price is slightly higher (+2.0 sen) after factoring in the potential earnings contribution from these hardware companies and also the potential GDV of RM97.6m from the Pasir Mas land.

Risks to Our Call

Weaker-than-expected property sales and construction orderbook replenishment.

Higher-than-expected sales and administrative costs.

Negative real estate policies.

Tighter lending environments.

Source: Kenanga Research - 10 Apr 2015