This article first appeared in The Edge Malaysia Weekly on July 8, 2024 - July 14, 2024

ONCE the terms are met, Dubai-based logistics giant DP World plc will take the lead in negotiations with Suria Capital Holdings Bhd (KL:SURIA) and the Sabah government and external parties to drive the much-anticipated value creation of Sapangar Bay Container Port (SBCP), in a deal potentially worth millions of ringgit.

Suria Capital is joining forces with DP World, one of the world’s largest port operators, to develop the container port into a regional trade hub in East Asia and expects to finalise a joint venture (JV) by August.

On April 24, Suria Capital inked a conditional share subscription agreement with DP World, which would see DP World taking up 51% equity interest in a JV company, to be named DPW Sabah, with Suria Capital, through its wholly-owned unit Sabah Ports Sdn Bhd, holding the remaining 49%. Sabah Ports Authority will issue DPW Sabah the licence to operate and manage the container port.

However, the JV is subject to the fulfilment of certain conditions. These include the availability of a port licence and a review of port tariffs, which have been unchanged for 35 years.

In an exclusive interview with The Edge at Sapangar Bay, Suria Capital Holdings Bhd group managing director Datuk Ng Kiat Min says DP World is keen on subscribing for a 51% stake in the JV to enjoy the shared revenue arising from SBCP.

“DP World likes the strategic location of Sapangar Bay and has approached us. DP World’s projected revenue from the JV within the next 10 years is in millions of ringgit. The group will co-manage SBCP with us while driving the business forward. DP World will bring its expertise to the port and network [foreign direct investment] to Sabah with the intention to increase cargo volumes, all of which are easily worth RM1 billion in value creation,” she says.

Under the proposed collaboration, DP World will not be paying Sabah Ports for usage of the port and its existing equipment, but rather accord an agreed-upon sum from the revenue arising from the partnership, she adds. She declined to disclose the figure as negotiations are still ongoing.

“When all the conditions precedent are fulfilled, hopefully by August, that will be the effective date of the collaboration until the end of the current concession,” says Ng. Sabah Ports and DPW will then negotiate the new terms of further years with the Sabah government. The current concession is in its 20th year and will end in 2034.  

“The negotiation meeting will be called by the Ministry of Public Works and we have up to one year from the first meeting to conclude its terms,” says Ng.

The Sabah government holds a 50.74% controlling stake in Suria Capital via Qhazanah Sabah (45.4%), Yayasan Sabah (3.67%) and the state’s Chief Minister Inc (1.665%).

Although the deal poses no ownership impact on Sabah Ports, Ng concedes that Suria Capital may see some revenue loss from SBCP, which makes a “significant contribution” to Sabah Ports’ container revenue. SBCP currently handles 72% of the total container throughput in Sabah.

Still, she points out that Suria Capital stands to gain from DP World’s global expertise and supply chain network.

In Asia-Pacific, DP World began by establishing Singapore as its regional headquarters in 2021 and has been aggressively expanding into other countries. Today, it operates 19 container terminals in the region — in Australia, China, Indonesia, Malaysia, the Philippines, South Korea, Thailand and Vietnam.

“It will take time for the [additional business from collaborating] to develop. The value that we are anticipating should be seen in about two years,” Ng says, adding that the group’s container business had been on an upward trend and is projected to hit 2019 levels again.

If DP World wants to dispose of the shares, Suria Capital will have the first right of refusal to acquire the additional 2% from DP World to put it in the driver’s seat at 51%. And in the event that DP World defaults on its side of the deal, all of its shares will be acquired by Suria Capital. 

Looking at Suria Capital’s financial performance in the last five years, partnering with the Dubai player appears to be the best opportunity within reach to grow SBCP’s earnings to the next level.

Suria Capital has been delivering predictable financial results since financial year ended Dec 31, 2019 (FY2019), with annual net profits ranging from RM34 million to RM52 million on the back of revenue in the region of RM275 million to RM298 million. (See table)

For the first quarter ended March 31, 2024, Suria Capital’s net profit rose by 40.2% to RM14.86 million from RM10.6 million during the same period last year on 15.4% higher revenue of RM73.8 million.

The port concessionaire attributed the increased revenue to higher recognition from construction services amounting to RM6.9 million, which was zerorised at the gross profit level and brought about no impact to the group’s profit.

”In any case, we would expect at least 10% in revenue growth this year. That’s the normal and organic assumption for our business,” says Ng.

In FY2023, port operations contributed the lion’s share of 92% to the group’s revenue, while logistics and bunkering services accounted for less than 1%; contract and engineering and ferry terminal operations, 2%; and property development and leasing, less than 1%.

For the container business, general cargo, bulk oil and vehicles made up the bulk of imports in 2023, while crude oil, palm oil and general cargo accounted for the highest exports.

People in Sabah pay hefty prices for imported goods due to the low volumes of outgoing cargo, therefore, incoming goods bear the charges of the return trip.

“Sabah faces a serious trade imbalance due to the shortfall in export volume. Containers come in laden and [leave empty], contributing to the high cost of living. Even with the cabotage policy, the reality is not a significant impact to this matter. The reality is that Sabah needs more industrialisation — and DP World is confident that its methodology will be able to address it,” says Ng.

In the meantime, foreign direct investments such as China’s renewable energy producer SBH Kibing Solar New Material Sdn Bhd, as well as South Korea’s major copper foil maker SK Nexilis, are hoped to keep boosting cargo volumes at SBCP.

In 2023, Kibing and SK Nexilis — which have facilities in Kota Kinabalu Industrial Park (7km away from SBCP) — generated 7,165 and 1,842 TEUs (20ft equivalent units) respectively to the port. They are expected to generate sizeable container volumes once SBCP becomes fully operational.

SBCP is one of three components of Sapangar Bay Integrated Port. The other two are Sapangar Bay Oil Terminal, which is nearing the completion of its jetty’s extension in August; and Sapangar Bay Conventional Cargo Terminal. The latter is a relocation of the Kota Kinabalu Port General Cargo Operation some 20km away to Sapangar Bay, and is still in the design stage.

As at March 31, Suria Capital had spent RM1.04 billion on infrastructure upgrades and equipment, utilising 76.5% of its RM1.36 billion capital expenditure (capex).

The bulk of the capex was allocated for the development of SBCP. The expansion works, which are worth RM899.8 million, to double SBCP’s handling capacity from 500,000 currently to one million TEUs, began in September 2021 and are slated for completion in 2026.

Over at the property development side, Suria Capital owns prime land at the landmark waterfront area in Kota Kinabalu city. The first phase of the property development Jesselton Quay on 16.25 acres, has been completed in partnership with SBC Corp Bhd (KL:SBCCORP). Another two parcels of land totalling about 14 acres, to be known as Jesselton Docklands, will be jointly developed with EXSIM Development Sdn Bhd’s 75%-owned unit BEDI Development Sdn Bhd. Construction for the RM4.2 billion undertaking is expected to commence in the first half of next year with an estimated completion timeline of six years.

“Suria Capital will still own the land while EXSIM will bear the cost of construction. Then we’ll split the proceeds,” Ng shares.

Suria Capital will be entitled to at least RM180 million, representing 18% of the estimated net development value of RM1 billion, satisfied via RM45 million in cash and RM135 million in kind.

Additionally, if the actual net development value exceeds RM1 billion, Suria Capital will be entitled to any excess entitlement, which will be satisfied by payment in kind, in the form of retail units, carparks or other commercial components, excluding Airbnb units, for short-, medium-, or long-term stays.

The developments at Suria Capital appear to have drawn investment interest in its counter over the last 12 months. Over the period, the stock has risen 60% to close at RM1.99 apiece last Friday, valuing the company at RM688.2 million. Trading at a price-earnings ratio (PER) of 17.55 times, the counter stands below the industry average of about 22 times.

Bloomberg data shows that the two analysts covering Suria Capital have a “buy” and “sell” call each, with a consensus target price of RM2.08, which indicates a potential upside of 4.5% from last Friday’s closing price. 

It appears that the prospects of the group’s proposed collaboration with DP World have yet to be fully priced into the valuations, barring finalisation and specifications of the deal.

AmInvestment Bank Research, in a May 27 report, is positive on Suria Capital’s collaboration with DP World, noting that the key catalyst for the former would be higher port tariffs.

“Assuming a 10% rise in port service rates, we estimate that the group’s net profit for FY2024 could increase by 33%,” the research house says.

Suria Capital has a dividend policy to pay out up to 35% of its full-year net profit. In the mid-2010s, the group paid out a record high of seven sen per share, contracting over the years to 3.5 sen in FY2023. 

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