• We initiate coverage on Suria Capital (Suria) with a HOLD call as we are cautious over its near term growth potential albeit casting a positive view in the long term amidst various initiatives to boost Sabah’s economy.

• While the government’s initiatives to boost Sabah’s economy are positive for Suria’s port operations, we believe the impact could be protracted, leading to ROE dilution in the interim.

• We expect earnings to grow remain flattish in the next few years as potential gains from the recovery of the plantation sector would be offset by higher depreciation arising from its new investments.

• Initiate with a HOLD based on DCF-derived TP of RM2.20 which implies FY18PE of 9.7x.

A proxy for Sabah’s industrialization

Suria being the sole concessionaire of major ports in Sabah makes a good proxy for direct exposure to Sabah industrializations. Various economic impetuses conceptualized for the State such as the Pan Borneo Highway, Sipitang Oil & Gas Industrial Park (SOGIP) and Sabah Oil & Gas Terminal (SOGT) in Kimanis create more investments in the state and more activities at the ports.

Expansions to complement Sabah’s economic ambitions

In tandem with the government’s plan to spend RM11.42bn in Sabah under the 11th MP, Suria has allocated capex worth RM640m. This would go to expand port facilities and services as well as consolidate its existing operations to the Sapangar Bay Port. The capex spending complements ongoing and future initiatives to boost Sabah’s economy. The expansion of SBCP positions the port as a transhipment hub as it leverage on its strategic location along the main shipping routes of the East Asian sea trade as well as being at the centre of the Brunei-Indonesia-MalaysiaPhilippines East ASEAN Growth Area (BIMP-EAGA). Suria is in talks with MMC to tap the latter’s expertise in container port operations.

Higher CAPEX to moderate earnings growth

While we expect revenue to improve from FY18 onwards in tandem with the recovery in CPO production, we see limited growth in earnings due to the higher depreciation charge following Suria’s planned capex spending. In the immediate term, we expect FY17 earnings to remain weak due to lingering effects of the El Nino which sees lower CPO production as well as higher operating costs incurred.

Initiate with HOLD recommendation at TP RM2.20

We initiate coverage on Suria with a HOLD recommendation and a DCFderived TP of RM2.20 (WACC: 8.2%). Our TP implies an FY18F PE of 9.7x which we see as fair. While we are positive on the potential growth in Sabah’s economy in view of the various initiatives by the government, we believe the impact to Suria could be protracted.

Source: BIMB Securities Research - 29 Sept 2017