Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 13 Dec 2019, 9:38 AM


Serba Dinamik Holdings - Massive EPCC Win in Uzbekistan

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We are positive on SERBADK securing 3 new contracts with combined value of >RM1b, demonstrating its job winning capabilities. These wins, which include 1 EPCC contract in Uzbekistan and two O&M contracts from Petronas Carigali, bring YTD wins to ~RM2.5b and current order-book to ~RM9b. We expect further contract wins moving forward, with management targeting RM10b orderbook by year end. Reiterate OP with a higher TP of RM5.25.

New contract wins. Yesterday, SERBADK announced securing three new contracts, which include: (i) one engineering, procurement, construction and commissioning (EPCC) contract from Uzbekistan, valued at USD250m (or ~RM1b), and (ii) two operations and maintenance (O&M) contracts locally from Petronas Carigali, with no specific value as the contracts are on a “call-out” basis (refer to table below for more detailed breakdown of the contracts). Nonetheless, we believe the two local O&M contracts should be rather small in value (i.e.

Positive on the wins. We are positive on the contract wins, highlighting the company’s continued capabilities in securing new jobs. In fact, the company had previously highlighted Central Asia as a key growth market, and hence, the massive EPCC contract win in Uzbekistan represents a fruition of this growth strategy. The new contracts bring YTD wins to ~RM2.5b, and order book to ~RM9b. We expect these contracts to fetch roughly 17% gross margins.

Expect more contract wins. Moving forward, we expect more contract wins as management targets order-book to reach RM10b by end of the year, providing earnings visibility for at least the next 2-3 years. We expect more jobs flow to come from Central Asia as the company aims to expand further into the region, while also relying on its stronghold markets in the Middle-east and Malaysia.

Reiterate OUTPERFORM. Post-contract win, we raised our FY19E/FY20E earnings forecasts by 4%/10%, after imputing a higher order-book replenishment assumption of RM3b from RM2.5b previously. As such, our TP has also been raised to RM5.25 (from RM4.80 previously), pegged to FY20E PER of 15x – which is around +2SD from its 2-year mean valuation.

We continue to like SERBADK for having one of the best earnings delivery track records within the oil and gas space, coupled with its good management and best-in-class ROE against other sector peers. Further contract wins and continued earnings delivery would act as catalysts moving forward.

Risks to our call include: (i) lower-than-expected order-book replenishment, (ii) weaker-than-expected margins, and (iii) geopolitical unrest in the Middle-East affecting oil and gas-related activities.

Source: Kenanga Research - 14 Aug 2019

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