• Suria’s FY18 lower core net profit of RM53m (-11.3% yoy) was due to higher overall port operating expenditure

• Overall, FY18 results were in-line with our forecast at 96%

• 4QFY18’s weaker core net profit of RM8m (-48.6% qoq, -54.9% yoy) was impacted by higher cost and effective tax rate

• Maintain HOLD with a DCF-derived TP of RM1.53 rolled over to

FY19 FY18 core profit margin fell due to higher opex

Suria’s FY18 operation revenue (ex. construction revenue) of RM263.8m grew 13.4% yoy mainly contributed by higher port operations and contract & engineering segment. The increase in port revenue (94% of total revenue) was due to higher conventional cargo throughput of 30.9 million MT (+2% yoy) and container cargo of 382,881 TEU (+8% yoy). As for contract & engineering segment, the increase was due to revenue recognition which amounted to RM17.5m from railway upgrading project. However, core net profit decreased by 11.3% yoy to RM53m (ex. impairment of trade receivable worth RM10.8m due to revisions of estimate cash flow in FY17) was because of overall higher port operating expenditure. As a result, core net profit margin dropped 5.6ppts yoy 20.1%. Overall, Suria’s FY18 core net profit was in-line with our full year forecast at 96%.

4QFY18 earnings impacted by higher cost and effective tax rate

PBT for 4QFY18 fell to RM16.1m (-14.9% qoq, -5.1% yoy) despite positive growth in operating revenue, 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. Additionally, higher effective tax rate of 50.7% further dragged down its core net profit to RM8m (-48.6% qoq, -54.9% yoy). NP margin drop to 11.4% (-13.8ppts qoq, -18ppts yoy).

Near-term outlook remains challenging

Moving forward, Suria’s near-term outlook remains challenging with Malaysia’s GDP growth expected to slow down and higher opex due to its port expansion. Nevertheless, the group’s long term outlook is deemed better due to its port infrastructure development as well as Suria’s property segment development progressing as planned. The recent review of the 11MP by the Federal Government has also maintained allocation for the transformation of Sepangar Bay Container Port into a transhipment hub.

Maintain HOLD with new TP of RM1.53

Maintain HOLD with new TP of RM1.53 as we rolled forward our DCF valuations to FY19 (WACC: 8.8%). Risks to our call are higher than expected throughput handled and susceptibility to prices of major export items such as crude oil and palm oil.

Source: JF Apex Securities Research - 1 Mar 2019