Investment Highlights

• We upgrade Suria Capital to BUY from HOLD with a higher DCF-derived fair value (FV) of RM1.85/share (from RM1.40/share previously), which implies a FY24F PE of 10.1x, 0.8 standard deviation above its 5-year average of 8.5x. There is no FV adjustment for ESG based on our 3-star rating.

• Suria’s higher DCF stems mainly from lowering our WACC assumptions to 7.7% from 9.9% previously on a more conservative equity market returns of 10% (from 13.5% previously). For now, we maintain our forecasts following a meeting with management recently.

• Management is hopeful for a positive port service tariff revision by the end of the year, which has been unchanged since Sabah ports’ privatisation in 2004. This is supported by administrative orders to raise some services, of which certain crane charges have been hiked by 50% YoY. Assuming a conservative port service tariff rise of 10%, we estimate that FY24F net profit could be raised by a substantive 33%.

• Suria is positive on its strategic location as a trans-shipment hub for the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area, focusing on intra-Asian trade with China and the Far East. Hence, the relocation of Indonesia's capital city from Jakarta to Nusantara encompassing 260,000 hectares in East Kalimantan will be positive for the region's throughput over the longer term.

• Hence, Sabah Ports has entered a strategic collaboration with global port/logistics operator, DP World (DP), which is expected to draw in substantive foreign direct investments into free economic zones, logistics hubs and industrial parks, with an immediate focus on Sepangar Bay Container Port.

• By leveraging on DP's network of multinational logistic operators and in-house feeder operation, Feedertech together with the state's abundant natural resources and low wage structure, Suria aims to increase throughput for outbound cargo, of which 85% are empty currently. The group is planning to expand its Sepangar Bay port for container, oil terminal jetty and conventional cargo terminal with a RM900mil federal government allocation since 2021. By FY25F, Suria expects to spend RM150mil on port equipment and cranes to support the port expansion projects, which is in line with our capex assumptions.

• Underpinned by improving long-term prospects, Suria currently trades at an attractive FY24F PE of 8.5x, below its 5-year peak of over 12x while offering a decent and sustainable dividend yield of 4%.

Source: AmInvest Research - 2 Oct 2023