Started off as a financial conglomerate in Sabah, SURIA has since shifted its focus to the port handling business in 2004 by securing a 30-year port concession to operate Sabah’s major ports from the authority. With stable margins and consistent growth, SURIA’s earnings base has been consistently growing in the past few years through several market cycles. Now, it is poised to transform itself into a conglomerate with exposure to property development and Sabah tourism through the iconic Jesselton Quay waterfront development with SBCCORP (NOT RATED) which is poised to be the main tourism and commercial hub for Sabah in the longer term. More importantly, we believe that the market has yet to fully price in the potential from Jesselton Quay and the remaining 7.0 acres land earmarked for further development. Recently, in line with general market, its share price has also consolidated to more reasonable level, providing a decent entry point for investors. Given its bright prospects, we initiate coverage on SURIA with DCF-driven SoP TP of RM3.41 which translates into a potential attractive upside of 31.9%.

Exclusive port concessionaire of Sabah’s major ports. Originally a financial conglomerate, SURIA has turned its focus to port handling business by acquiring the business operations of Sabah’s key ports from the Sabah Port Authority in 2004 with 30-year concession expiring in 2034. Accounting for 85.2% of the group’s revenue in FY13, the port division has been providing stability to the group’s earnings base with 34.2-41.2% operating margin which is above the average achieved in the past 5 years. With multiple infrastructure and equipment upgrade plans in place, we believe that its port operations will continue its growth path and possibly achieving higher margins through efficiency gains in the long run.

A partner in the iconic Jesselton Quay project. The group looks poised to benefit from its participation in the Jesselton Quay development project worth c.RM1.8b in 16.3 acres land in Kota Kinabalu Port with SBCCORP (NOT RATED) as a facilitator with no development expenditure to be incurred by SURIA. This will provide material value accretion for SURIA as SBCCORP will pay SURIA streams of cash flows with pre-specified minimum payments coupled with more upside should the Net Saleable Value (NSV) is higher.

Further value to be unlocked in the remaining land? Beside the 16.3 acres of Kota Kinabalu land to be developed by the JV, SURIA still has the remaining 7.0 acres of land in its coffers for future development. At the moment, 2.0 acres of the land mentioned is occupied by Jesselton Point, the ferry terminal owned by SURIA and the 5.0 acres would be utilized to build a new office tower and several commercial properties as indicated by the management tentatively. JV partner is yet to be identified and a finalization of the development plan could be another catalyst for SURIA and value accretive as they would participate in the upcoming project in a similar manner.

Current valuation indicates good entry point with value from Jesselton Quay yet to be fully priced in. Using DCF-driven SoP valuation methodology, we derived a TP of RM3.41, translating into FY15 forward PER of 15.0x which is at a discount to peers’ average of 27.6x. In addition to that, we have used 2 different discount rates for cash flows from its core port operations and scheduled cash payments from Jesselton Quay to account for different risk factors. Thanks to recent market weakness and possibly also due to delay in Jesselton Quay development plan, its share price has consolidated to a more reasonable pricing range, making its valuation more compelling. In view of the decent upside of 31.6%, we initiate coverage on SURIA with an OUTPERFORM rating with key risks to call being a delay in Jesselton Quay project and slower-than-expected growth in Sabah state economy.

Source: Kenanga