• Suria Capital’s (Suria) FY17 net profit of RM48.9m (-26.7% yoy) come in below our full year expectation making up only 89%.

• Lower FY17 net profit 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 (+4.5%) mitigated the decline in container cargo (- 1%).

• We revised lower our earnings forecast for FY18 and FY19 by 10.8% and 7.9% respectively to reflect higher operating expenditure. Maintain our HOLD recommendation based on DCF-derived TP of RM1.85.

Earnings below expectation due to higher operating costs

Suria’s FY17 operating revenue (ex. construction revenue) of RM232.5m grew 2.2% yoy mainly contributed by improvement in port operation segment. For the year, 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 30.3 million MT (+4.5% YTD) which offset the decline in container cargo to 353,161 TEUs from 357,386 (-1.2% YTD). However, Suria’s FY17 net profit dropped 26.7% to RM48.9m 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 of 27.8% (vs 2016: 20.2%). As a result, NP margin drop 8.3ppts to 21%.

Higher QoQ performance derived from port operation segment

The group PBT, increased by 19.8% qoq in tandem with higher revenue growth of 32.2% qoq due to positive contribution from port operation segment despite negative contribution from other segments.

Mid-term outlook remains challenging

We revised our earnings forecast for FY18 and FY19 lower by 10.8% and 7.9% respectively after adjusting the higher operating costs. Suria’s mid-term outlook remains challenging due to uncertainties in the regional container trade. Additionally, higher planned capex for its port expansion would likely 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 RM1.85

Due to our earnings revision, we derived a lower TP of RM1.85 (RM2.00 previously) and maintained HOLD recommendation. Our TP is based on 10- year DCF (WACC: 8.5%) which implies a target FY18E PE of 9.7x.

Source: BIMB Securities Research - 1 Mar 2018