Investment Highlights

• We maintain HOLD on Suria Capital with an unchanged DCFderived fair value (FV) of RM1.40/share, which implies a FY23F PE of 8x, close to its 5-year average of 8.5x. There is no FV adjustment for ESG based on our 3-star rating.

• 1HFY23 core net profit (CNP) of RM29mil (after adjusting for loss of RM7mil from disposal on concession assets) was within expectations, accounting for 46% of our FY23F earnings and 55% of consensus estimates.

• 1HFY23 CNP increased 39% YoY due to the halving depreciation/amortisation mainly from for concession asset and 8% increase in revenue contribution from port activities, partly offset by a 20% YoY decline in the revenue of other segments. This was partly offset by total TEUs handled declining by 3% to 207K TEUs in 1HFY23.

• Sequentially, 2QFY23 revenue increased 9% to RM70mil, driven by a significant 65% increase in logistics, bunkering and ferry terminal operations. The port operating revenue in 2QFY23 increased slightly by 3%, driven by an 8.7% QoQ growth in total containers handled to 107.6mil TEUs. However, 2QFY23 CNP dropped by 29% QoQ to RM12mil due to higher operating costs in the port segment.

• Despite a 2% YoY throughput volume decline in 2QFY23, we expect this to gradually recover in 2H. Looking ahead, we are optimistic on the long-term outlook for Sabah, which is a key palm oil and crude oil producing state.

• A rerating catalyst would come from a revision of port tariffs, which have been unchanged for the past 35 years. The review of its tariff rates was approved in principle by the state cabinet in 2020 for implementation at a later date.

• Additionally, the state cabinet also agreed for a 30-year extension to its port operating concession – expiring in 2034F – subject to terms and conditions yet to be finalised.

• Suria currently trades at a fair FY23F PE of 8x, 0.5-standard deviation below its 5-year historical given that valuations are likely to remain depressed amid weakening global economic headwinds that could lead to tepid recovery for throughput volumes.

Source: AmInvest Research - 29 Aug 2023