Investment Highlights

• We maintain HOLD on Suria Capital with an unchanged DCF-derived fair value (FV) of RM1.15/share. Our FV implies a FY23F PE of 8.2x, which is close to its 5-year average PE of 8.5x. There is no FV adjustment for ESG based on our 3-star rating.

• We are cautious on the short-term outlook for Suria’s port operations. The export volume index fell 13% to 149.5 points in Feb 2023 from 171.4 points in Dec 2022. Likewise, the import volume index fell 10% to 164.1 points in Feb 2023 from 182.1 points in Dec 2022 (Exhibit 1).

• Exports of palm oil from East Malaysia were 19% lower at 1.9mil tonnes in 1QFY23 against 2.3mil tonnes in 4QFY22. Although East Malaysia’s exports of palm oil declined QoQ in 1QFY23, this was within expectations as palm oil production is usually seasonally weaker in 1Q. On a positive note, exports were 5% higher than 1.8mil tonnes in 1QFY22 (Exhibit 2).

• Despite the short-term headwinds, we are optimistic on the long-term outlook for Sabah, which is a key palm oil and crude oil producing state.

• Also, the relocation of manufacturing bases by multinational companies out of China to Southeast Asia bodes well for the growth of Sapangar Bay Container Port as a premier transhipment hub for the Brunei-Indonesia-Malaysia-Philippines East ASEAN growth area.

• We also think the strategic collaboration with DP World, which will undertake the management and operations of Sapangar Bay Container Port, is positive as it would allow Suria to tap into the vast resources of DP World. The specifics of the collaboration are still under negotiation.

• On Suria’s Sapangar Bay Integrated Port, Sapangar Bay Container Port (SBCP)’s expansion works are scheduled for completion in 2025F. Upon completion, the port’s handling capacity will increase by 2.5x to 1.25mil TEUs from 500k TEUs annually. Meanwhile, the expansion of Sapangar Bay Oil Terminal (SBOT) will be completed in Sep 2023. This will allow SBOT to handle 2 vessels at one time (Exhibit 3).

• A rerating catalyst would come from a revision of port tariffs, which have been unchanged in the past 35 years. Suria has submitted request for a review of its tariff rates, and it was approved in principle by the State Cabinet since 2020 for implementation at a later date, which remains uncertain at this stage.

• Additionally, negotiations with the Sabah state government for a 30-year extension to the current concession has commenced. As a recap, the current concession is expected to end in 2034.

• Suria currently trades at a fair FY23F PE of 8.5x, at parity to its 5-year historical average, and offers a decent dividend yield of 4%.

Source: AmInvest Research - 14 Apr 2023