Suria Capital Holdings - Multi-Year Growth Potential

Suria, which  manages  eight major ports in Sabah, was  recently  in the spotlight  when  its  joint venture  (JV)  with SBC  is  finally  started to bear fruit  via  the  Jesselton  Quay  development  project.  We  foresee  this providing  multi-year  growth  potential  for  the  group.  We  initiate coverage on Suria  with a BUY call. Our  DCF-based MYR3.50  FV  implies a FY14F P/E of 16.9x, in line with the industry average.

• Sabah’s port operator.    Suria  operates  several  major ports in Sabah, namely:  i)  Kota  Kinabalu  Port,  ii)  Sapangar  Bay  Oil  Terminal,  iii) Sandakan Port,  iv)  Lahad Datu Port,  v)  Kunak Port,  vi)  Kudat Port, vii) Tawau  Port  and  viii)  Sapangar  Bay  Container  Port.  The  group  also operates other port-related businesses as well.
• Details on the Jesselton Quay project.  Suria  recently came under the spotlight  when  the  long-awaited  Jesselton  Quay  development  project started  to  make  progress.  The  group  signed  a  JV  agreement  on  the project  with  SBC  Corp  (SBC  MK,  NR)  on  21  May  and  received shareholders’ approval at  its  recent EGM.  Hence, we believe the project will  kickstart very soon.  We view the salient terms  of  the agreement  as being favourable  to Suria  as it  only needs  to provide the land  and assist and facilitate in the project’s implementation. All other cost and expenses relating  to  the  project,  including  implementation  and  completion  of Jesselton Quay,  will be borne by SBC.  The group is also  guaranteed  a minimum return of MYR324m in cash, or in kind, over eight tranches.
• Initiate  coverage with a  BUY. As  Suria’s core operations are expected to  experience  organic  earnings  growth,  we  apply  conservative assumptions into our forecasts. W e also did  not factor in any tariff hikes. As it is, we find Suria still undervalued vs its closes peer. By comparison, Integrax  (INTEG  MK,  BUY,  FV:  MYR2.32)  is  trading  at  a  higher  P/E multiple.  Despite the recent rally in  Suria’s  share price,  we still think  the stock  has  not  priced  in  the  cash  inflow  from  the  Jesselton  Quay  JV. Thus, we initiate coverage on Suria  with a BUY call  and a MYR3.50  FV, which is based on a 20% discount on its DCF (at a WACC of 7.2%). Our FV gives an implied FY14F P/E of  16.9x, which is largely in line with the industry average.

Company Highlights

About Suria.  Suria  was listed in 1996 and was originally established as a financial conglomerate. In 2004, the group  shifted its business focus to port services  following a  major  restructuring.  During  that  corporate  exercise,  Suria  acquired  the  business operations of Sabah’s key ports from Sabah Ports Authority  via a major privatisation exercise.  The  terms  of  the  privatisation  agreement  come  with  a  30-year  port concession (since Sep 2004), which can be extended for a further 30-year period. Concession agreement. Based on the privatisation  agreement, the amount payable by  the  Group  for  lease  of  the  land  is  tiered  based  on  the  year  of  the  concession.

Currently,  Suria’s  concession  is  at  its  10th year,  during  which  the  annual  lease payment (payable to  the port  authority) amounts to MYR3m. Suria will also incur a charge  of  RM0.75  per  tonne  of  cargo  handled  in  excess  of  the  annual  threshold throughput  of  10m  tonnes.  As  Suria  approaches  its  11th year  in  2014,  the  annual lease payment will be accordingly raised to MYR5m from MYR3m previously.

Port  operator.  Suria  currently  manages  eight  major ports in Sabah. Originally, the group managed: i)  Kota Kinabalu Port,  ii) Sapangar Bay Oil  Terminal,  iii)  Sandakan Port, iv) Lahad Datu Port, v) Kunak Port, vi) Tawau Port, and vii) Kudat Port. In 2007, it  built  a  container  terminal  –  Sapangar  Bay  Container  Port  –  at  a  cost  of  some MYR400m and shifted Kota Kinabalu port’s container operations to Sapangar Bay.

Other business segments.  Apart from port operations, Suria  has also ventured into other  businesses,  such  as:  i)  equipment  supply  and  maintenance,  ii)  logistics  and bunkering  services,  iii)  contract  and  engineering,  and  iv)  ferry  terminal  operations. Nonetheless,  port  operations are  the  group’s main core business,  contributing about 83.2% to total 2012  revenue. This is  followed  by  its logistics and  bunkering services division, with 9.1% (See Figure 2).

Stable margins.  As shown  in the table above  (Table 1),  Suria’s  revenue  has been fluctuating  over  the  past  four  years.  This  was  largely  due  to  the  instability  in  the global economy, which has  impacted  throughput volume. Nonetheless, we note that the  group’s margins were  relatively strong  during this period  –  maintaining  at around 40%. Gross margins further improved in 1HFY13 to 44% despite lower y-o-y revenue contributions.  Apart from that, Suria  has been able to keep  its net margins  at around 19-23%  for  the  past  four  years,  thus  keeping  annual  earnings  stable  at  around MYR50m.

Ports performance at a glance. As mentioned earlier, Suria’s main core business is its  port operations. Its other business divisions’ contributions  to  group earnings are quite minimal. Among Suria’s eight ports, Sapangar Bay Container Port is the busiest –  running  almost  at  full  capacity,  while  the  other  seven  are  running  at  50-60% utilisation rate.  The cargo handled by its  ports varies, ranging  from container  and dry bulk  to  liquid bulk and  roll-on/roll-off (RORO).  Cargoes at Suria’s ports  are  mostly for import/export,  unlike  ports  in  West  Malaysia  where  transshipment  volumes  are relatively  much  higher  vis-à-vis  Sabah’s  ports.  The  total  throughput  handled  by Suria’s  ports  in  2012  amounted  to  22.5m  tonnes  and  374k  TEUs  (twenty-foot equivalent units. The types of cargo and annual tonnage handled by the group’s ports are illustrated in Tables 2 and 3 below:

Restructuring logistics and bunkering. Suria’s logistics and bunkering division has not  been  performing  well,  but  the  group  has  identified  it  as  a  future  growth  node, given  Sabah’s  strategic  location  between  Oceania and Far  East Asia. Hence, Suria has plans to monetise such  an  advantage. This division has  –  since October  –  been partnered up with  Singapore-based bunkering firm  Petro Summit to develop Sabah into  a  new  regional  bunkering  hub  within  the  Brunei,  Indonesia,  Malaysia  and  the Philippines-East Asean  Growth Area  (BIMP-EAGA)  economic zone. Management is confident  that  this  segment  will  contribute  positively  to  Suria  in  FY14,  although  it expects the contribution to  remain marginal  for the time being. Management is of the view that such a marginal contribution is still expected to  at least  curb losses, which may prove a drag on Suria’s overall performance.

Property  development  an  interesting angle.  Suria’s  share price has been rallying strongly  over  the past few weeks,  and we believe that  this is  largely  spurred by  its potential  property  development  JV  at  Jesselton  Quay,  which  will  finally  come  to fruition.  The  group  signed  a  JV  agreement  venture   with  SBC  Corp  on  21  May  to develop the project on  a prime  piece of land  in Kota Kinabalu. The land  is the former site  of  the  Kota  Kinabalu  container  port  and  is  adjacent  to  Jesselton  Point.  The project is  believed to have  a  net  sellable value of MYR1.8bn and,  according to the salient terms in the agreement, Suria will get an 18% minimum guaranteed profit from the net sellable value, or around MYR324m. This will be paid in eight tranches. In our opinion, Jesselton Quay is not merely a Kota Kinabalu property development project, but is “THE” development that can give rise to other growth opportunities for the state capital,  or  even  Sabah  itself.  We  also  see  it  as  crucial  for  Suria’s  future  growth.
(Please refer to the following section, Jesselton Quay, for more details.)

Source: RHB