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Author: AmInvest   |   Latest post: Fri, 6 Dec 2019, 5:27 PM

 

Serba Dinamik Holdings - Acquiring additional land for Lumut LNG project

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Investment Highlights

  • We maintain our BUY call on Serba Dinamik Holdings (Serba) with unchanged forecasts and sum-of-parts-based (SOP) fair value of RM6.50/share, which implies an FY19F PE of 20x — 33% below Dialog’s 30x, the company’s closest peer in Malaysia.
  • Serba is acquiring a 4-acre industrial land in Lumut for RM8mil cash or RM46 psf for its 42%-owned associate E&E Gas, which is building an onshore liquefied natural gas (LNG) distribution infrastructure facilities.
  • This will be undertaken by Serba acquiring the entire stake in Sg Rek Sdn Bhd, which owns the land.
  • Recall that Serba swapped a 10-acre residential land in the same vicinity in October last year for RM16mil or RM37 psf for a 42% equity stake in E&E Gas.
  • The group also subscribed for 10mil redeemable convertible preference shares for RM10mil cash in E&E, which has awarded the RM333mil engineering, procurement, construction and commissioning works to build the LNG facilities to Serba.
  • The higher premium for the new land stems from the seafronting requirement for Serba to lay the pipeline to the jetty which is being built.
  • Also, Serba does not need to pay for the conversion of the land's residential status to industrial.
  • The cost of the land is not included in the construction cost as Serba plans to lease it to E&E over a 15-year operation at a gross rental yield of 10%. This will have minimal earnings accretion of RM0.4mil, assuming interest cost at 5%.
  • Hence, we are neutral on this development which will cause a slight increase to the group's FY19F net gearing of 0.2x. Also, this land investment is part of the group's execution plan for the LNG facilities.
  • With a gross gearing cap of 1x vs. 0.8x currently, management reaffirms that there is no requirement for an equity-raising exercise with the issuance of RM800mil sukuk programme in October last year for working capital and debt refinancing.
  • Serba is currently trading at a grossly undervalued FY19F PE of 12x vs. over 30x for Dialog Group. We remain positive on Serba’s O&M business model, which is expanding its long-term recurring earnings profile by strategically leveraging its EPCC and asset ownership platform.

Source: AmInvest Research - 18 Mar 2019

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