• Suria Capital’s (Suria) 9M17 core net profit of RM42m (-7.5% YTD) come in below our full year expectation making up only 69%.

• Lower core net profit (excluding impairment of trade receivable worth RM10.8m due to revisions of estimate cash flow) was mainly due to higher operating expenditures as well as higher effective tax rate.

• Port operation segment continued to be the major contributor of revenue, representing about 97%. Higher throughput from conventional cargo (+4%) mitigated the decline in container cargo (-2%).

• We revised lower our earnings forecast for FY17 and FY18 by 8.5% and 5.7% respectively to reflect higher operating expenditure. Maintain our HOLD recommendation based on DCF-derived TP of RM2.00.

Earnings below expectation due to higher operating costs

Suria’s 9M17 operating revenue (ex. construction revenue) of RM172.3m grew slightly 0.4% YTD mainly contributed by improvement in port operation segment (+0.8% YTD). Port operation contributed about 97% to the group revenue. The higher port revenue was due to higher conventional cargo throughput (majorly contribute from bulk oil and general cargo) of 22.2 million MT (+4% YTD) which offset the decline in container cargo of 262,308 TEUs (- 2%). However, Suria’s 9M17 core net profit (excluding impairment of trade receivable worth RM10.8m due to revisions of estimate cash flow) dropped 7.5% to RM42m mainly due to higher operating expenditure such as higher leasing port land, stevedorage for tug boat services and amortisation of CAPEX as well as higher effective tax rate. As a result CNP margin drop 2.1ppts to 24.4%.

QoQ performance affected by higher effective tax rate.

Operating revenue increased by 9.3% qoq due to positive contribution from port operation revenue (+20.5%) despite negative contribution from other segments. Nevertheless, core net profit fell 4% due to higher effective tax rate.

Mid-term outlook remains challenging

We revised our earnings forecast for FY17 and FY18 lower by 8.5% and 5.7% respectively to reflect higher-than-expected operating costs and higher tax rate. Mid-term outlook remains challenging due to uncertainties in the regional container trade and oil palm market. Additionally, higher planned CAPEX for the port expansion would impact margin. Nevertheless, we are more positive on its long-term outlook backed by potential growth in Sabah’s economy in view of the various industrialisation initiatives by the government. This would be positive for Suria’s port operations but we believe the impact is likely to be protracted.

Maintain HOLD with lower TP of RM2.00

Due to our earnings revision, we derived a lower TP of RM2.00 (RM2.20 previously) and maintained HOLD recommendation. Our TP is based on 10-year DCF (WACC: 8.2%) which implies a target FY18E PE of 9.4x.

Source: BIMB Securities Research - 4 Dec 2017