Highlights

• We met up with Suria Capital Holdings Bhd’s (Suria) management on updates of the group’s current operations and future expansion plans, moving into 2020. In 2019, Suria handled a total of 28.8 mln tonnes of cargo throughput and 379,374 twentyfoot equivalent unit (TEU) of containers (see Appendix 1) – a slight decline against the previous year. Amid the potentially slowdown of trading activities due to delay in shipments particularly from China, Japan, Hong Kong and South Korea, we have imputed a lower assumption of 360,000 TEUs and 27.5 mln tonnage for 2020.

• While the relatively large scale Sapangar Bay Container Port (SBCP) expansion has temporarily put on hold, Suria is focusing on the expansion of Sapangar Bay Oil Terminal (SBOT) (see Appendix 2) with construction period over 18 months. Already, a financing facility from Bank Pembangunan Malaysia Bhd valued at RM80.0 mln was secured. We reckon that the move will be earnings accretive in subsequent years as the current jetty is operating at close to full capacity.

• In the meantime, the group is focusing on two key property development projects, namely; Jesselton Quay and One Jesselton Waterfront. We note that the phase 1 construction of Jesselton Quay Central is at 68.5% completion as of end-2019, whilst the joint-venture project with Gabungan AQRS Bhd for the latter is in the process of obtaining necessary approvals.

• Despite several revisions to the port tariffs in Peninsular Malaysia, Sabah’s port tariff remained the same for the past 30 years. Suria is currently pursuing the long overdue port tariff revision with the Sabah Ports Authority, subject to the State Cabinet’s approval. At the same time, Suria is also seeking for an extension for the port concession that allows the group to operate eight ports in Sabah till 2034

Valuation And Recommendation

We continue to favor Suria for its position as the leading port operator in Sabah, backed by long-term sustainable income from the ports concession business, equipped with continuous expansion plan in coming years. At the same time, the property development segment is expected to pick-up from the progress billings of Jesselton Quay Central project which will cushion the potential weakness from the ports segment, arising from the Covid-19 outbreak.

We note that Suria is also seeking to initiate discussions with the relevant State agencies and authorities in the near term to secure the extension of the concession period for port operations coupled the revision of long overdue port tariffs. We opine a re-rating is in the cards, should the latter takes place.

We maintain a HOLD recommendation on Suria with an unchanged target price of RM1.37. We valued Suria through a sum-of-parts (SOP) approach as we valued both its port operations and property development segments on a discounted cash flow approach (key assumptions include a WACC of 8.5%, terminal growth rate of 1.5%) to reflect its ability to generate recurring revenues and steady earnings growth over the longer term. Meanwhile, we ascribed a 10.0x target PER to both its logistics and bunkering contract as well as engineering and ferry terminal operations businesses, based on their potential earnings contribution in 2020.

Risks to our recommendation include dependency and sensitivity to prices of commodity products (mainly crude oil and crude palm oil). Weaker-than-expected property sales could see delays in payments from its joint-venture partners on the property development segment. Any delay in project completion from the expected timeline completion will also tighten cash flow projections and thus reducing our DCFderived valuations.

Source: Mplus Research - 6 Mar 2020