Summary

• Suria Capital Holdings Bhd’s (SURIA) 1QFY23 net profit fell 23.5% YoY to RM10.6m,  dragged down by the weaker contribution from the port operations segment.  Revenue for the quarter decreased 9.9% YoY to RM64.0m.

• The reported earnings came below expectations, amounting to 16.6% of our full year  net profit forecast RM64.1m and 21.0% of consensus forecast of RM50.6m. The  weaker-than-expected numbers was attributable to the decrease in cargo  throughput and tonnage handled. We reckon that with commodities prices  (particularly crude oil and crude palm oil) remain volatile, demand may continue to  weaken in subsequent quarters.

• In 1QFY32, SURIA handled a total of 98,980 (-2.6% YoY) TEUs, which makes up to 21.5% of our assumption of 460,000 TEUs for the year. Meanwhile, SURIA’s total  tonnage handled was at 5.3m tonnes (-11.7% YoY); which accounted to 22.3% of our  expectations of 23.8m for the year.

• Meanwhile, SURIA has entered into a strategic collaboration with DP World (DPW), a  leading provider of worldwide smart end-to-end supply chain logistics in mid-January 2023. We are sanguine on the move in bid to improve operational efficiency and potentially strengthen contribution from the port operation segment. On the port  expansion progress, we note that progress is well underway whereby the Sapangar  Bay Container Port (SBCP) is well on track for completion in 2025.

• On the property development segment, Phase 2 of Jesselton Quay Central (JQC)  project comprising waterfront service suites that carries a gross development value of RM250.0m is expected to launch in 2023. This is based on revised terms stated  in the Amended and Restated Agreement dated 30 November 2022.

• Meanwhile, we gather that tourist arrival to Sabah demonstrated strong growth in  2022, premised to the re-opening of international borders. Moving into 2023, we reckon that the positive trend may continue to be supported by China’s border re-opening. This may in turn beef up contribution from the contract and engineering &  ferry terminal operations business segment that remained in red in 1QFY23.

Valuation & Recommendation

• Following the weaker-than-expected reported numbers, we trimmed our earnings forecast by 29.0% and 25.7% to RM45.5m and RM49.4m for FY23f and FY24f  respectively, adjusting for the slower contribution from the port operation segment.  Following the earnings revision, we downgrade SURIA to HOLD (from Buy) with a  lower target price of RM1.20.

• We adopt 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 15.0%, terminal growth rate of 3.0%). Meanwhile,  we ascribed a 10.0x 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 FY23f.

• 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 - 22 May 2023