COMMENT BY C.S.TAN
CASH-RICH Suria Capital Holdings Bhd will cross the last hurdle to become a port operator when shareholders approve its plans at an EGM on June 29.
Following that meeting, it will be able to proceed to take over all the seven ports presently run by Sabah Ports Authority (SPA).
Surprisingly, not many investors seem to know the Government has approved the privatisation of the Sabah ports. The Economic Planning Unit in the Prime Minister's Department had, in fact, approved it last year.
With the Securities Commission's approval last month, that leaves only the EGM before the final process is carried through, with completion of the exercise expected in a couple of months.
From this point, investors can assume that Suria will emerge as a port operator. Its share price closed at 60 sen last Friday.
The takeover of the Sabah ports will give Suria a completely different complexion. Currently cash-rich from the sale of the Sabah Bank but without a core business, Suria will become operator of all the ports of Sabah.
There are four public-listed companies in which port operations form the core business.
These are NCB Holdings Bhd, Bintulu Port Holdings Bhd, Integrax Bhd and Johor Port Bhd. None is in any kind of financial trouble. Suria will be the fifth listed port operator.
It can be argued that Suria should perform better than Integrax, which operates Lumut Port. Most of the goods shipped into Perak may go through Port Klang whereas all trade going in and out of Sabah passes through one of the seven ports that Suria is taking over.
It may not be an exciting business in port operations but it's a steady, cash-generative activity.
Suria is paying a fair price for the port infrastructure. It will pay RM150mil for the ports and RM60mil for land and other assets – a total of RM210mil cash.
The price for the ports is based on a multiple of just eight years the net profit of the ports in 2002. The price for the other assets was guided by land valuers.
Suria need not draw on bank debt to pay for the ports. The entire price will be financed from the proceeds of RM277mil raised from its sale of Sabah Bank.
For the price it has to pay, Suria will have a 30-year concession to operate all the seven Sabah ports – Sapangar Bay Oil Terminal and the ports of Kota Kinabalu, Sandakan, Tawau, Lahad Datu, Kudat and Kunak.
The number may sound impressive but most of the revenue could be flowing through Kota Kinabalu, while Kudat and Kunak could be very small ports.
Bintulu Port, for instance, operates just one port and it has a market capitalisation four times that of Suria. Bintulu in Sarawak caters to huge shipments of natural gas, petroleum, palm oil and timber.
Suria's port concession comes with several obligations of which the most significant seems to be capital expenditure (capex) of RM1.3bil over the concession period. This works out to an average of RM43mil a year.
If this should prove to be too large a burden to bear, there is a provision in the privatisation agreement to re-negotiate.This provision is intended to enable Suria to maintain its projected free cashflow.
If Suria spends the capex, it is expected to ensure there will be a reasonable payback period to recoup its investments. As it incurs the capex, the new port facilities will enable Suria to earn more revenue.
It could be this objective of shifting the capex to Suria that the ports will be transferred to the company. As a listed company, Suria can raise funds from the stock market, if need be.
Other objectives would be to manage the ports on a commercial basis, raise their profitability, develop a cost conscious culture and improve customer services.
Some private sector managers opt for easy ways – depressing salaries and increasing prices – to raise profits when they take over monopolistic government-linked companies (GLCs).
Even the most unimaginative civil servants know how to do that.
Effective managers are supposed to achieve their targets by improving productivity, offering a wider range of services for customers and removing unnecessary costs. This was originally the concept in privatisation.
Suria, which is 47.8% owned by the Sabah state government, may well perform in its new job. In the current environment, political leaders are aware that the people will judge them partly in how well GLCs are run.
It will not be in Suria's agenda to turn around the ports – they have been profitable, and they made a combined profit of RM18.5mil in 2002. It will be Suria's job to improve on that.
The ports will grow with the increase in Sabah's trade. The state imports consumer goods that arrive in 20-ft containers.
The outgoing cargo is, however, mainly on bulk carriers and tankers that carry palm oil, petroleum and timber.
In the weeks and months to come, there will be more investor awareness of a company on the brink of a transformation into a port operator.
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