• Suria’s 1H18 earnings of RM29.5m (+6% yoy) was in-line with our full year expectation making up 53%.

• Higher earnings are mainly due to increase in overall operational revenue (+20.9% yoy) especially in port operations and contract & engineering segment.

• Higher operating cost mitigated by strong operational revenue, but margin compressed to 22.3% (-3.2ppts) in 1H18.

• Maintain our forecast and HOLD recommendation based on unchanged DCF-derived TP of RM1.75 (WACC: 8.6%).

Results within expectation

Overall, Suria’s 1H18 earnings increased by 6% to RM29.5m and were in line with our full year forecast at 53%. The positive growth was mainly contributed by port operations (+8.6%) and contract & engineering segment (+>100%).

Positive top line growth from port and contract & engineering segment

Suria’s 2Q18 operation revenue (ex. construction revenue) of RM69.3m grew 20.3% yoy and 10.2% qoq mainly contributed by higher port operation and contract & engineering segment (refer table 2). The increase in port revenue (91% of total revenue) was due to i) higher conventional cargo throughput of 7.9 million MT (+11% yoy) mainly contributed by higher bulk oil, palm oil, PKE and general cargo throughput and ii) higher container cargo of 91,091 TEU (+2% yoy, 1% qoq). As for contract & engineering segment, the increase was due to revenue recognition of RM7.3m from railway upgrading project connecting Halogilat and Tenom for Sabah State Railway Department.

Margin fell due to higher operating cost

Earnings for 2Q18 of RM15.2m grew slower at 2.9% yoy and 6.5% qoq despite double-digit top-line growth, impacted by higher operating expenditure such as higher amortisation capex, stevedorage contract labour and cost for tug boat services, as well as write-off on bulk fertilizer conveyor facility at Sandakan Port. As a result, 2Q18 NP margin dropped to 21.9% (-3.8ppts yoy, -0.8ppts qoq). We estimate FY18 margin to remain at current levels due to higher planned capex for its port expansion.

Maintain HOLD with unchanged TP of RM1.75

Suria’s outlook remains challenging especially with domestic GDP growth facing slowdown and pace of Sabah state development not expected to be significant. This could have an impact on Suria’s growth moving forward. We maintain earnings forecast and HOLD recommendation with DCF-derived TP of RM1.75 (WACC: 8.6%). Our TP implies an FY18F PE of 9.2x which we see as fair.

Source: BIMB Securities Research - 23 Aug 2018