Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Thu, 23 Jan 2020, 4:55 PM


Serba Dinamik - 3Q19: EPCC Slows, But to See Stronger 4Q

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Serba’s 3Q19 results were within expectations. Notably, EPCC activities have been slow this quarter, but should accelerate moving into 2020. O&M activities will see a seasonally stronger 4Q driven by Middle East. Its RM10bn order book target for 2019 has been achieved. We retain our BUY rating and 12-month target price of RM5.50.

Results in Line

3Q19 net profit rose 36% yoy to RM113.2m, with 9M19 profit of RM355.8m (+28% yoy) making up 75% and 76% of our and consensus estimates. Malaysia, Qatar and UAE remained the group’s key markets, which made up 29%/26%/21% of the group’s total revenue. Qatar registered the strongest growth (+83% yoy) among the other regions, driven by works from its new contracts secured, while Malaysia (+39% yoy) benefited from more robust activities, particularly in Sarawak. Despite concerns over group margins as businesses expanded, 9M19 operating margin remained stable at 14.8% (vs. 14.3% in 9M18). Net gearing was slightly higher at 0.73x (2Q19: 0.65x) with improvement seen in the operating cash flow.

Weaker EPCC Offset by Stronger Associates and Lower Finance Cost

Sequentially, net profit and revenue declined by 13% and 8% respectively, dragged down by weaker EPCC segment revenue, which fell by RM41m. We gather that Petronas and Shell activities were cumulatively lower by RM15m in 3Q19, while another substantial contract in UAE, New Thunder, also saw a RM13m drop in contribution. EPCC progress for its asset ownership projects in Laos, Tanzania and Uzbekistan remained slow, and is only expected to pick up moving into 2020. The drag from a weaker EPCC segment was partly cushioned by the lower finance cost as 2Q19 included the cost of raising the US$ sukuk, and higher associate/JV profit as a result of higher contribution from CSE Global. 3Q19 effective tax rate was higher by 8ppts due to under-accruals backdated to 2018.

Maintain BUY With RM5.50 Target Price

Serba has achieved its RM10bn order book target set earlier in 2019, split into RM6bn O&M and RM4bn EPCC. We maintain our BUY call and target price of RM5.50, pegged to a 14x FY20E PER. Key risks include: 1) unforeseen delays in its client maintenance schedule, and 2) margin deterioration.

Source: Affin Hwang Research - 26 Nov 2019

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