Summary

• Suria Capital Holdings Bhd (Suria) has accepted to make the full settlement of income tax to Lembaga Hasil Dalam Negeri Malaysia (LHDNM) in the sum of RM53.7m in respect to the 2 Joint Venture Agreements (JVA) executed in 2013 and 2015. Suria has signed two JVA; one with SBC Corporation Berhad dated 21 May 2013, measuring 16.3-ac, while another with Gabungan AQRS Berhad dated 16 March 2015, measuring 7.0-ac.

• Recall that Suria has made a Real Property Gain Tax (RPGT) settlement amounted to RM25.8m in 2015. Hence, the move will set off against the initial payment of RM18.6m as well as 12 months instalment of RM0.6m from April 2021 to March 2022 to LHDNM.

• For the remainder balance of RM27.9m, Suria Capital has agreed to commence the monthly cash instalment of RM1.2m from April 2022 until February 2024 with final cash instalment of RM1.2m in March 2024. Despite the cash instalment move taking place, we are assured that Suria will have adequate cash flow to maintain on going operations.

• Future earnings growth and cash flow, however, may be dented by the move which could also result in the delay in expansion of Sabah ports over the longer term. Still, we lauded Suria’s corporation with LHDNM to the settlement of the said income tax which signifies the seriousness in ensuring that legal risk exposures arising from any act of default in fulfilling tax obligations are adequately managed and mitigated.

• With commodity prices at multi-year high, demand is expected to remain elevated in line with the progressive economic recovery. Therefore, we reckon that Suria’s ports will be kept busy over the foreseeable future.

Valuation & Recommendation

• There will be no earnings revision to FY21f given that the tax repayment will only commence in FY22f. Hence, we only slash our earnings forecast by 26.0% to RM30.2m in FY22f to account for the additional tax repayment. Following the recent share price appreciation, we downgrade Suria to SELL (from HOLD) at an unchanged target price of RM1.02.

• We value 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 5.0%) to reflect its ability to generate recurring revenues and steady earnings growth over the longer term. Meanwhile, we ascribed a 10.0x (unchanged) target PER to both its logistics and bunkering contracts as well as engineering and ferry terminal operations businesses, based on their potential earnings contribution in FY21f.

• Risks to our recommendation include dependency and sensitivity to commodity prices (mainly crude oil and crude palm oil). The port operation business is highly regulated by the State and Sabah Ports Authority that requires a number of approvals, licenses, registrations and permits from various regulatory authorities.

Source: Mplus Research - 29 Mar 2021