Investment Highlights

• We reiterate BUY on Suria Capital with a higher DCF-derived fair value (FV) of RM2.27/share (from RM1.85/share previously) with a higher terminal growth rate of 5% (from 3%) to account for potential port tariff rate hikes with an unchanged WACC of 8%.

• Our FV implies a FY24F PE of 13x, which is 24% below Westports’ 3-year average of 17x. There is no FV adjustment from our neutral ESG rating of 3-star.

• While fine-tuning FY24F-FY25F earnings, we lowered FY23F net profit by 10% as 9MFY23 core net profit (CNP) of RM17mil (after adjusting for loss from disposal on concession assets of RM7mil) was below expectations, accounting for 68% of our earlier full-year forecast and 67% of consensus estimates. As a comparison, 9MFY22 accounted for 80% of FY22 core net profit.

• Suria has announced a flattish YoY interim dividend of 2.5 sen per share, constitutes 40% of our FY23F dividend.

• 9MFY23 core net profit (CNP) increased 7% YoY, supported by revenue growing by 6% to RM214mil from RM202mil in 9MFY22, which was driven largely by higher crane charges.

• On a YoY basis, port operating revenue grew by 10% to RM80mil in 3QFY23 despite lower cargo (-9% YoY) and container (-6% YoY) throughput. The growth is attributed to the upward revision of crane hire charges on 1 August 2023, as highlighted in our update on 2 October. The approved tariff rose by 160% and 133% for both 20” container crane and 40” container crane to RM200/hour and RM350/hour since the last effective charges of RM75/hour and RM150/hour. The new tariff hike for crane hire charge contributed to the increased revenue despite lower throughput recorded.

• QoQ, port operating revenue expanded by 15% QoQ, contributed by increased revenue mainly from port construction (+18%) and port operating revenue (+1.2%). Revenue of port operations includes construction services arising from building ports infrastructure and facilities. However, this construction services revenue has no impact to Suria’s profit as the same amount of construction services cost is recognised under cost of sales and eliminated at gross profit level.

• Marginal QoQ volume increase of 4% and 2% was recorded container and cargo throughput respectively. This is in line with a 16% QoQ increase in East Malaysia’s palm oil exports. For comparison, East Malaysia’s exports increased 5% YoY to 2.0mil tonnes from 1.9mil tonnes in 3QFY22. Suria’s own Lahad Datu and Sandakan ports handle 38% of overall East Malaysian palm oil exports.

• According to Department of Statistics Malaysia, the export volume index rose 9% to 162.2 points in Sept 2023 from 148.5 points in Jan 2023. Likewise, the import volume index rose 4% to 196.7 points in Sept 2023 from 182.1 points in Jan 2023.

• We remain positive on the short-term outlook for Suria’s port operations. Despite the tight throughput margin in 3QFY23, we anticipate a stronger throughput volume next year due to optimism in a gradual export recovery for the state.

• A rerating catalyst could stem from the long-awaited revision of port tariffs across all segments, which have been unchanged for the past 35 years. The state cabinet approved the review of tariff rates in principle in 2020, with implementation scheduled at a later date. Assuming a conservative port service rise of 10%, we estimate that FY24F net profit could be raised by a substantive 33%.

• Looking further ahead, we are optimistic on the long-term outlook for Sabah, a key state in palm oil and crude oil production, due to:
  1) Management expecting liquid bulk volume growth of 20% upon the completion of Sepangar Bay Oil Terminal (SBOT) Twin Jetty on 30 April 2024. The port utilisation currently is almost at 100%, hence, the additional jetty will provide support to the first one. The second jetty can cater for vessel sizes up to 60,000 deadweight tonnage (DWT), double from the current maximum of 30,000 DWT.
  2) Relocation of manufacturing bases by multinational companies out of China to Southeast Asia bodes well for the growth of Sapangar Bay Container Port as a premier transhipment hub that can serve up Brunei Indonesia Malaysia Philippines East ASEAN (BIMP-EAGA) region’s 80mil population.
  3) The strategic collaboration with DP World, which will involve the management and operations of Sapangar Bay Container Port (SBCP), is positive as it would allow Suria to tap into the vast resources of DP World. The negotiations are likely to be completed next year.
  4) The potential transformation of Kota Kinabalu Industrial Park (KKIP) into a free trade zone could generate synergies with SBCP, which is just 7km apart. KKIP recently secured major multinational investments with SK Nexilis and Kibing Solar that could provide additional throughput of 93,000 TEUs (containers) and 1.1 mil mt (conventional cargo) per annum.

• Suria currently trades at a bargain FY24F PE of 10x, below its 5-year historical peak of 13x, and offers a decent dividend yield of 4%.

Source: AmInvest Research - 1 Dec 2023