We are neutral on Sunway’s proposed acquisition of two hardware trading companies. Maintain BUY, with an unchanged MYR4.18 TP (11% upside). The acquisition values the companies at implied 8.8x FY18F P/E. We view the move as an effort to strengthen the trading division so that it can be disposed of at a better value in future. Nevertheless, the listing of Sunway Construction remains the near-term focus.

MYR138m acquisition. Sunway announced its proposed acquisition of two hardware trading companies – Winstar Trading SB (Winstar) and PNB Hardware & Trading Pte Ltd (PND) for an estimated total consideration of MYR138m (MYR131m + SGD2.6m). The amount is payable in three tranches: i) MYR82m for a 60% stake in 2Q15; ii) a 20% stake in 2Q17 based on a 5x average EBITDA for the preceding two years; and iii) a remaining 20% stake in 2Q18 based on 5x average EBITDA for the preceding two years. These will be funded internally.

Reasonable valuations. The acquisition is packaged with a net profit guarantee of MYR15.7m (MYR15m + SGD250k) per year for 2015, 2016 and 2017, proportionate to the effective stake for the respective year. This implies an acquisition P/E multiple of 8.8x FY18F (with 100% stake), which is deemed reasonable. The transaction also values the companies at 1x P/BV, as we note that Winstar owns some warehouses in the Klang Valley at low costs.

Strengthening trading division. While the market may not like the acquisition as it is not related to its core divisions (ie property and construction), we think the move is to strengthen the trading division, and to beef up its value so that Sunway could spin off the division at a better value in future. The existing trading division already contributed about MYR35m in profit last year. In addition, it is also strategic to acquire profitable market leaders with more than 30 years of experience in the wholesaling of hardware market. The companies currently distribute many hardware brands. The net margin is quite commendable at about 7-9%.

Forecast. We keep our earnings forecasts unchanged as the impact on earnings is rather minimal.

BUY, TP stays at MYR4.18. The listing angle of Sunway Construction (SCG) remains as the focus for the stock. We maintain our valuation assumption for SCG. Maintain BUY on Sunway with a SOP-based TP of MYR4.18.