Investment Highlights 

• We initiate coverage on Suria Capital Holdings Bhd (Suria) with a BUY recommendation and a target price of RM2.20. Started off as a property developer and subsequently transformed into a financial entity, Suria has now established itself as a prominent port operator in East Malaysia with a track record of approximately 10 years of operational experience in the port operations industry. 
• We like Suria for its ability to generate a stream of recurring income, coupled with stable port operating margin between 28.0%-31.0% over the past four years. We reckon that its expansion plan and transforming Sapangar Bay Container Port (SBCP) into a transshipment hub of East Malaysia will be a key driver for earnings growth — a project that is funded by the Federal government as an initiative under the 11th Malaysia Plan. 
• Suria is on the midst of returning to the property development sector. Suria will provide the land and engage as a facilitator for the implementation of two projects, whilst its joint venture partners will be responsible for the overall construction and completion at their own expenses. Therefore, we think that Suria will incur minimal risks in both the sizeable property development projects.
• We arrive at our target price by ascribing a sum-of-parts (SOP) approach as we value its port operations and property development businesses on a discounted cash flow approach (WACC: 8.5%, Terminal Growth: 1.5%); whereas we ascribe 10.0x PER to both its 2018 logistics & bunkering & contract and engineering & ferry terminal operations businesses. At the target price, Suria’s implied PERs are about 20% discount to its peers, but we think the discount is fair given Suria’s smaller revenue base and market capitalisation.

Recommendation

We like Suria for its position as the leading port operator in Sabah, having secured longterm concession agreements with relevant authorities until 2034 and a relatively large scale expansion plan in the pipeline. Suria has accumulated over 10 years of operational experience in the port operations and currently owns a total of eight ports in Sabah (four each in the east and west coast). Over the years, Suria has established itself as a key player in the regional connectivity mode of sea transportation.

We reckon that the port operations business will remain resilient and we like the aforementioned business for being more defensive in nature vs. other industries to weather any economic downturn. As it is, the port operations segment dominated the group’s revenue (averaging at 79.1% of the group’s total revenue over the past four years), whilst delivering commendable and stable operating margin of between 28.0%- 31.0% over the same period.

We are sanguine on the group’s expansion plans for SBCP as it moves towards becoming a transshipment hub of East Malaysia. The group will embark on a large scale expansion which will increase its Twenty-Foot Equivalent Unit (TEU) handling capacity to 1.25 mln (from 0.5 mln) per annum. The expansion will also boost Sabah’s economic competitiveness in order to address the issue of trade imbalances, lower cost of business activities and reduce the cost of living in Sabah.

Meanwhile, its return into the property development segment will not only unlock the value of the landbank, but will also be earnings accretive in the long run. Both projects are strategically located with good connectivity. The Jesselton Quay development project is located approximately 10 km from the International Airport and is next to the International Cruise Terminal, whilst the One Jesselton Waterfront project is just adjacent to the capital city of Sabah.

At current price of RM1.90, we think that its share price is slightly undervalued, trading at prospective 2017 and 2018 PERs of 10.9x and 10.6x, which are at a discount to its peers average of 14.8x and 14.2x respectively. This implies potential upside vis-à-vis its peers in the similar industry.

At the target price of RM2.20, Suria will trade an implied PER of 12.6x and 12.2x for 2017 and 2018 respectively, which is at approximately 20% discount to its peers. We think that the discount is fair to reflect Suria’s smaller revenue base and market capitalisation.

Investment Risk

Risks to our recommendation include severe weather changes. Abnormal weather such as heavy rain that leads to flood, haze, dense fog and low visibility could disrupt port operations. The yearly rainy season in most of Sabah is from October to February.

Suria’s port activities are dependent and sensitive to prices of commodity products (mainly crude oil and crude palm oil). Rising commodity prices encourages more transactions and vice versa. In 2016, commodity products make up to RM76.9 mln or 30.9% of the port operation’s segment revenue.

The port operation business requires a number of approvals, licenses, registrations and permits from various regulatory authorities. Port operations are highly regulated by the State and Sabah Ports Authority.

With Suria diversifying into the property development market, weaker-than-expected property sales could see delays in payments from its joint-venture partners. Any delay in project completion from the expected timeline completion will tighten cash flow projections and thus reducing our DCF valuations.

Source: Mplus Research - 8 Dec 2017