MIDF Bullish On Confirmed Suria Capital – DP World Partnership

DP World issued a statement confirming the signing of a partnership agreement with Sabah Ports Sdn. Bhd. (Sabah Ports), a wholly owned subsidiary of Suria Capital Holdings Berhad (Suria Capital), to jointly manage Sapangar  Bay Container Port (SBCP) on Wednesday (Apr 25).

MIDF Research (MIDF), in a note today (Apr 25) said the partnership aims to solidify the port’s role as a key regional trade centre within the East  ASEAN growth area, encompassing Brunei, Indonesia, and the Philippines (BIMB-EAGA). 

Suria Capital and DP World have engaged in discussions since CY19, and early last year, the Sabah government  approved for Sabah Ports to pursue a strategic collaboration with DP World.

The collaboration was understood to  involve the management and operations of SBCP, along with investments in logistics and supply chain infrastructure in  Sabah. Recall that SBCP is presently undergoing a significant expansion project aimed at boosting its annual handling  capacity from 0.5m TEUs to 1.25m TEUs.

In previous discussions with management, it was noted that there might be  a slight delay in achieving the initial 1QFY25 completion target due to challenges in sourcing materials for land  reclamation. 

MIDF maintains a positive outlook on this potential partnership, considering DP World’s position as the fifth largest global port operator, commanding an 8.9% market share, with about 30% of its revenue  generated from containerised cargoes.

This collaboration presents an opportunity to tackle Sabah’s high logistics costs by building a robust shipping network and expanding the cargo base. Sabah Ports currently grapple with trade  imbalances, with outbound containers comprising only 30% laden boxes versus 70% empty ones, primarily due to  insufficient cargo-generating activities in the state. Furthermore, the state was also considering the establishment of a  free economic zone at Kota Kinabalu Industrial Park (KKIP), an area that aligns with DP World’s expertise and  specialisation. 

However, it is important to note that the specifics of the partnership agreement, including the equity structure, have  not been disclosed yet, as Suria Capital has not officially announced it.

Clarity is needed regarding the concrete plans  to attract significant foreign direct investments (FDIs) for its expanded capacity, particularly considering the current  scenario where main line operators bypass Sabah Ports due to limited cargo volume. Historically, the port utilisation  rate at SBCP ranged between 50% to 60%. 

This year, MIDF anticipates enhanced performance primarily driven by the full-year contribution from SK Nexilis and Kibing  Group’s plants, which commenced operations in early 4QFY23. These two plants are expected to contribute  approximately 38,400 TEUs per annum to Suria Capital.

Additionally, the volume of conventional cargoes is forecasted  to rise due to increased bulk oil volume following the completion of the new jetty at Sapangar Bay Oil Terminal (SBOT) by 2QFY24, as the existing jetty approaches its maximum capacity. 

No changes were made to MIDF earnings estimates. The stock is currently trading at a premium compared to both its  own and the sector’s 5-year average. Therefore, they are maintaining a SELL rating on the stock based on valuation  grounds, with our target price unchanged at RM1.60.

A key catalyst for the stock would be the long-awaited tariff revision, which has been approved in principle in CY20 and has not yet been factored into their model.

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