Serba Dinamik Holdings - Contract for Data Centre in UAE

Date: 07/08/2020

Source  :  KENANGA
Stock  :  SERBADK       Price Target  :  2.70      |      Price Call  :  BUY
        Last Price  :  1.65      |      Upside/Downside  :  +1.05 (63.64%)

SERBADK has been awarded a contract for the engineering and construction of a data centre in Abu Dhabi, UAE, worth USD350m (~RM1,469m), expected to be completed within 4 years. Overall, we are positive on the win, being a fruition of the company’s efforts in expanding its ICT segment, with the contract also bearing low job execution and delivery risks. Post-award, the group’s order-book stands at RM18.5b, of which 10% is derived from its ICT segment. Maintain OUTPERFORM, with TP of RM2.70.

Data centre project in UAE. SERBADK announced that it had accepted a letter of award from Future Digital Data Systems L.L.C to undertake the engineering and construction of a data centre in Abu Dhabi, UAE. The project forms part of the client’s initiative to develop a series of data centres across the MENA region, addressing the growing needs for such technologies e.g. cloud, AI, machine learning, and big data analytics. The contract is valued at USD350m (or ~RM1,469m), with an effective date of 1 September 2020, and is expected to be completed within 4 years.

Further strengthening of its ICT segment. We are positive on the contract award, being a fruition of the group’s effort in expanding its ICT segment. To-date, the group’s order-book stands at RM18.5b, of which 10% is derived from its ICT segment. As a comparison, the ICT segment had only contributed <5% of its order-book during the start of the year. The expansion of the group’s ICT segment also provides the group an additional source of revenue away from oil and gas, especially when the sector is currently in the midst of an extended down-cycle.

Meanwhile, we also do not see major risks in the contract’s job execution and delivery. Most of the works required seem to be fairly low in complexity (e.g. civil works, building works, and mechanical, electrical and plumbing works) and should fall comfortably within SERBADK’s expertise.

Overall, this marks as the company’s fourth contract announcement YTD, bringing YTD wins to ~RM10.9b. We expect the contract to fetch gross margin of roughly 15-20%, in line with the company’s historical average.

Maintain OUTPERFORM, with unchanged TP of RM2.70, pegged to 15x PER on FY21E EPS. No changes to our FY20-21E numbers for now, with the YTD wins still broadly within our FY20E order-book replenishment assumption of RM10b, while also pending the release of the group’s 2QFY20 results later this month.

We continue to like SERBADK given its superb record of earnings growth delivery, and for also having one of the best ROEs within the sector. With only ~40% of its order-book exposed to oil and gas, we believe it to be one of the few resilient names among its peers to better navigate through the current oil down-cycle.

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 - 7 Aug 2020

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