Summary

• Suria Capital Holdings Bhd (Suria) and Gabungan AQRS Bhd (Gabungan AQRS) have reached an amicable decision to terminate a joint-venture agreement (JVA) over the development of One Jesselton Waterfront project. The termination is due to the uncertainties poised by the Covid-19 pandemic that roiled the construction and tourism sector in Sabah.

• Recall that Suria has entered into a JVA with Gabungan AQRS back on 16th March 2015 for a mixed development property project situated on 6.3-ac land at Kota Kinabalu, Sabah, namely One Jesselton Waterfront project.

• According to the Termination Agreement, related advances paid by Gabungan AQRS in pursuant to the JVA shall be refunded by Suria. Upon the completion of the refund payment, the JVA shall be terminated and the parties shall be released from any rights and obligations under the JVA without any recourse to the other party.

• We gather that Suria would be required to fork out a total of RM7.9m for the refund payment to Gabungan AQRS. Breakdown of the refund payment include (i) deposit paid by Gabungan AQRS on signing of the JVA valued at RM2.0m that is payable within 14 business days from the date of termination agreement and (ii) Real Property Gain Tax (RPGT) paid in advance by Gabungan AQRS valued at RM5.9m that is payable within 6 months from the date of termination agreement.

• The refund payment is expected to reduce the cash balances from Suria’s war chest and is expected to result in a potential marginal decline in interest income. Under the prevailing situation, we expect a potential reduction in bottomline by 0.2% and 0.9% for FY21f and FY22f respectively. While we have yet to input any potential contribution from the aforementioned JVA, there will be no major impact in our forecast.

• With the port operations remain as the bread and butter of the group’s overall business, Suria will focus on the joint-venture project with SBC Corporation Bhd for the development of Jesselton Quay that sits on 16.3-ac land at Kota Kinabalu, Sabah. The physical works of the first phase of the project have commenced in December 2016 and is slated to be completed in 4Q21. Meanwhile, we note that the termination of JVA also present Suria to tap into other business opportunities on top of the 6.3-ac land over the foreseeable future.

Valuation & Recommendation

• With the marginal revision in earnings forecast, we maintained our HOLD recommendation on Suria, but with a higher target price of RM1.28 (from RM1.10) as we rolled over our valuation metrics to FY22f.
• 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 10.0%, 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 FY22f.
• 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 - 4 Oct 2021