Investment Highlights

• We maintain HOLD on Suria Capital with higher DCF-derived fair value (FV) of RM1.40/share (vsRM1.15/share previously).  Our FV implies a FY23F PE of 8x, which is close to its 5-year  average of 8.5x. There is no FV adjustment for ESG based on  our 3-star rating. 

• 1QFY23 core net profit (CNP) of RM17mil (after adjusting for  loss from disposal on concession assets of RM7mil) was  above expectations, accounting for 35% of our FY23F  earnings and 34% of consensus estimates. 

• The deviation is mainly due to lower-than-expected  depreciation and amortisation expenses as the Sabah State  government has granted the group’s port concession  extension until 2064. As such, we raise our earnings  estimates for FY23F-24F by 28%.

• On a YoY basis, port operating revenue grew 6% to RM58mil  in 1QFY23 despite lower cargo (-12% YoY) and container (- 3% YoY). Coupled with lower depreciation and amortisation  charges, CNP expanded 23% YoY to RM17mil in the quarter. 

• Meanwhile, port operating revenue fell 11% QoQ, dragged by  lower container (-11% QoQ) and cargo (-7% QoQ)  throughput. However, CNP expanded 75% to RM17mil QoQ  mainly due to lower depreciation and amortisation charges.

• Despite the weaker throughput volume in 1QFY23, we expect  throughput volume to gradually recover in 2H. Looking ahead, we are optimistic on the long-term outlook for Sabah,  which is a key palm oil and crude oil producing state. 

• A rerating catalyst would come from a revision of port tariffs,  which have been unchanged for the past 35 years. The  review of its tariff rates was approved in principle by the state  cabinet in 2020 for implementation at a later date. 

• Additionally, the state cabinet also agreed for a 30-year  extension to its port operating concession – expiring in  2034F – subject to terms and conditions yet to be finalised. 

• Suria currently trades at a fair FY23F PE of 7x,  1-standard deviation below its 5-year historical given that valuations are likely to remain depressed amid weakening  global economic headwinds that could lead to tepid recovery forthroughput volumes.

Source: AmInvest Research - 22 May 2023