Investment Highlights

• We initiate our coverage on Serba Dinamik (Serba) with a BUY call with an upside of 65% to our fair value of RM6.50/share based on sum of parts, which implies an FY19F PE of 20x. We highlight that there is much room for Serba’s earnings multiple expansion given that these valuations are half of Dialog’s 36x, which is the company’s closest peer in Malaysia.

• Like Dialog, Serba is involved in the maintenance of petrochemical plants and oil terminals, as well as substantive operations in the Pengerang Integrated Complex and overseas.

• Serba’s business model offers recurring operation & maintenance (O&M) services together with engineering, procurement, construction and commissioning (EPCC) works while having strategic stakes in gas, water and hydropower assets as well as complementary foreign engineering partnerships.

• Serba is expected to deliver phenomenal earnings growth with a 5-year FY13-FY18F CAGR of 47% while that of its peers contract by 32% due to the lingering impact of the 2015-2016 crude oil price collapse which led to global project cutbacks.

• Coming from a lower earnings base that was only 30% of Dialog in FY13, Serba’s FY13-FY18F CAGR earnings growth almost triples Dialog’s 15.9%. Over the next 3 years from FY17-FY20F, Serba’s 21% earnings growth is projected to surpass Dialog’s 16% which will lead to a net profit rivalling Dialog’s by FY20F.

• Astutely helmed by its founder Datuk Mohd Abdul Karim Abdullah, Serba has delivered an outstanding 4-year FY13-FY17 CAGR revenue of 50%, far outstripping any other O&G player in our coverage, driven primarily by its successful penetration of the Middle Eastern region, which almost doubled in earnings every year. This caused the Middle Eastern region’s share to Serba’s revenue to accelerate from only 20% in FY13 to 64% in 1HFY18.

• Compared to our selection of peers, Serba has delivered consistently superior EBITDA margins of 16.5% vs. an average of 15% since its listing on February last year from 3QFY16- 2QFY18, which was the most resilient with a standard deviation of only 1.5% compared with the sector’s 7.8%.

• Despite the group’s effective capital commitment of RM1.2bil, Serba’s net gearing is expected to gradually decline, from 0.7x in FY16 and 0.5x in FY17 to a healthier 0.3x-0.4x in FY18FFY20F. This stems from its growing cash generation while the capital outlays for projects under its asset ownership model and Pengerang base will be largely funded by profits of EPCC contracts which are bundled together with the group’s partners.

• With Brent crude oil prices rising 53% YoY to US$85/barrel, Serba is currently trading at a grossly undervalued FY19F PE of 12x vs. over 20x for Dialog, MMHE and Sapura Energy.

Source: AmInvest Research - 10 Oct 2018