Highlights

Serba Dinamik Holdings - Upstream Diversification

Date: 15/06/2020

Source  :  KENANGA
Stock  :  SERBADK       Price Target  :  2.70      |      Price Call  :  BUY
        Last Price  :  1.56      |      Upside/Downside  :  +1.14 (73.08%)
 


SERBADK is seeking to acquire the Teluk Ramunia Yard from Petronas for RM320m. The acquisition would qualify SERBADK to participate in offshore upstream fabrication jobs, thereby placing them in direct competition against other fabricators and offshore maintenance players such as SAPNRG, MHB, and DAYANG. The acquisition will give SERBADK a solid maiden footing to venture into that space, but will slightly increase its net-gearing to 1.1x, from 1.0x currently. Maintain OUTPERFORM, but with lower TP of RM2.70.

Acquiring Teluk Ramunia Yard from Petronas. SERBADK had proposed to acquire the Teluk Ramunia Yard from Petronas for a total purchase consideration of RM320m. Located in Mukim of Pantai Timur, Kota Tinggi, Johor, the acquisition entails four adjoining parcels of industrial land, with a total land area of 68.78 hectares, and industrial buildings comprising warehouses, workshops, fabrication yard and other ancillary buildings. The yard has the capacity to perform steel fabrication of offshore platforms and other structures of up to 50k tonnes. Barring any unforeseen circumstances, the acquisition is expected to be completed by 3QFY20.

Enables venture into offshore upstream fabrications. The acquisition is expected to play a significant role in the company’s maiden step into the offshore upstream fabrications space. The yard will qualify SERBADK to participate in various jobs, such as decommissioning, offshore transport and installation (T&I), integrated hook-up and commissioning (i-HUC), and top side maintenance. This would place SERBADK in direct competition with other fabricators and offshore maintenance providers, such as SAPNRG, MHB, and DAYANG. As a comparison, this yard has less than half the capacity of MHB’s fabrication yard in Johor, and SAPNRG’s yard in Lumut – both of which has an annual fabrication capacity of well over 100k MT. Nonetheless, we deem this to be more than adequate to help kick-start SERBADK’s venture into this space. Additionally, the yard’s proximity to Petronas’ RAPID project, as well as to Batam Island may also provide a competitive edge when it comes to job bidding. We expect this venture to bear fruition in the coming 12-18 months.

Financial impacts from the acquisition. The acquisition is expected to slightly raise SERBADK’s net-gearing to 1.1x, from 1.0x currently. Additionally, the acquisition may also incur additional finance costs of up to ~RM20m/year, before being offset by earnings as the venture bears fruit over the next 12-18 months. In the meantime, the group is seeking to lease out parts of the yard to help partially subsidise these fixed costs. Valuation-wise, we believe the acquisition price is also relatively fair. The acquisition consideration of RM320m is below its market price of RM335m as ascribed by the independent valuer. Comparatively, the acquisition implies a valuation of RM1.9m/acre – slightly higher than the valuation ascribed for DIALOG’s Pengerang land bank at RM1.7m/acre in our SoP for DIALOG, but do note that this acquisition comes with ready functioning facilities.

Maintain OUTPERFORM. Overall, we are cautiously optimistic on SERBADK’s efforts in venturing into the offshore space, allowing it to broaden its earnings base from the current downstream exposure. However, as similarly witnessed from its other offshore peers, this may inject a degree of volatility into its earnings. We conservatively lowered our FY20-21E earnings by 3% each, accounting for the higher finance costs, resulting in a lower TP of RM2.70 (from RM2.80 previously). Valuation remains unchanged at 15x PER on FY21E EPS. Nonetheless, we continue to like SERBADK given its current earnings resiliency despite the oil down-cycle. Further materialisation of contract wins, and continued delivery of earnings growth will remain as catalysts moving forward.

Risks to our call include: (i) lower-than-expected order-book replenishment, (ii) weaker-than-expected margins, (iii) project execution and delivery

Source: Kenanga Research - 15 Jun 2020

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