Serba Dinamik Holdings - Another strong quarter despite challenges

Date: 24/11/2020

Source  :  HLG
Stock  :  SERBADK       Price Target  :  2.50      |      Price Call  :  BUY
        Last Price  :  1.57      |      Upside/Downside  :  +0.93 (59.24%)

Serba reported 3Q20 core profit of RM148.0m (+0.1% QoQ, +30.8% YoY) bringing 9M20’s sum to RM429.6m (+20.8% YoY), coming in within our/consensus’ expectations, at 77/74% of full year estimates. We opine that Serba is still expected to record strong earnings going forward despite the volatility and challenges in the O&G industry due to its strong and sustainable earnings from its O&M segment. Its earnings growth in FY21-22F is expected to be underpinned by its large EPCC orderbook of c.RM9.3bn and its c.RM1.9bn ICT orderbook while its O&M orderbook of RM7.4bn (recurring) is expected to provide a strong and sustainable base. Maintain BUY with TP of RM2.50 based on 13.5x FY21 EPS.

Within expectations. Serba’s 3Q20 core profit of RM148.0m (+0.1% QoQ, +30.8% YoY) and 9M20’s sum of RM429.6m (+20.8% YoY) came in within our/consensus’ expectations, constituting 77/74% of full year estimates. An interim dividend of 1.35sen was declared for the quarter (vs 1.11sen SPLY); ex-date: 14 Dec 2020, bringing 9M20 dividends to 3.85sen (vs 3.07sen SPLY). No material EIs affecting net profit were recorded YTD.

QoQ. Serba’s 3Q20 profit was flat QoQ as marginally stronger O&M earnings (+1.4%) and stronger ICT earnings (+56%) were offset by lower EPCC earnings (-34.1%). Higher ICT earnings were attributable to higher work orders from Malaysia, Qatar and UAE while lower EPCC earnings were attributable to the monsoon season in Laos and lower revenue from UAE due to Covid-19.

YoY. Core profit was up 30.8% YoY primarily due to higher O&M and ICT orderbook as O&M and ICT PBT were up 37.6% and 995.7% (almost non-existent in FY19) respectively.

YTD. Profit was up 20.8% YoY due to higher orderbook backlog of RM18.5bn (vs RM10bn orderbook in 2019).

Outlook. While we believe that prospective job wins for Serba is expected to slow down in FY21, the trend of renewals for existing O&M contracts are still happening and we expect its O&M margins to be maintained going forward as there have been no contract renegotiations thus far. Its orderbook backlog of RM18.5bn would also be able to sustain its earnings growth in the next 2 years as the burn rate for the Block 7 and innovation hub contract is only expected to peak in FY22. Its Teluk Ramunia yard is also expected to improve its overall operational performance and margins as it would be able to internalize more contracts that were previously subbed out. It can also tender for more projects with its new yard in place. Its ICT segment is also expected to provide further growth for the Company as it continues to expand its footprint in Africa.

Forecast. No changes.

Maintain BUY at TP of RM2.50 based on 13.5x (unchanged) FY21 EPS. We maintain our buy call on Serba as we believe that (i) Serba would be able to maintain its high EBIT margins for its O&M division, (ii) the recurring nature of its O&M orderbook would ensure earnings sustainability in the foreseeable future despite lower prospective contract wins in FY21 and (iii) earnings are expected to grow exponentially in FY22 when its Block 7 project hits its peak earnings phase.

Source: Hong Leong Investment Bank Research - 24 Nov 2020

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