Investment Highlights

• We maintain our BUY coverage on Serba Dinamik (Serba) with unchanged forecasts and fair value of RM6.50/share based on sum of parts, which implies an FY19F PE of 20x, almost half of Dialog’s 36x, the company’s closest peer in Malaysia.

• Serba has entered into a share sale and purchase agreement to acquire a 49% equity stake in a 30MW hydropower concession in Laos called OHP Ventures for US$0.8mil (RM3mil). OHP Ventures has a joint development agreement with Thavone Athsamouth dated 9 January 2018 to develop, finance, construct, commission, operate and maintain 2 mini hydro installations/projects with an aggregate capacity of 30MW in the district of Houaphan, Laos. The project has already commenced in July 2018 with completion expected by January 2022.

• OHP Ventures owns 70% of the equity in Nam Taep 1.2.3 Hydropower Company Limited (NT), the concessionaire for the 2 power purchase agreements (PPA) with a tenure of 25 years with Électricité du Laos, which will buy the net electrical output generated from 3x5MW Nam Taep 1 and 3x5MW Nam Taep 2 hydropower energy generating facility that is being constructed at Ban Nam Taep and Ban Nameuang, Xam Tai district, Houaphan province in Laos.

• This development, which was indicated in our initiation report on 10 October, is not a surprise. Recall Serba has secured a US$66mil (RM275mil) EPCC contract on 19 July 2018 with NT to build the hydropower facilities. Based on Serba’s effective 34.3% stake in the hydropower dam and 20:80 equity-to-debt financing, we estimate that Serba would only need to raise US$5mil (RM21mil) in equity for this project.

• Assuming a 15% gross profit margin from the EPCC contract translates to RM10mil – 2x the equity portion. Hence, we are positive on this investment which could generate an NPV of US$24mil (RM100mil), which translates to 2% of Serba’s market cap, based on the group’s project IRR hurdle rate of 15%. With this Laos project raising the group’s gross power capacity by 33% to 119.9MW (see Exhibit 1), Serba’s MD Datuk Mohd Abdul Karim Abdullah has previously said that the group aims to further expand to 200MW under the group’s sustainable asset ownership strategy. We understand that the Laos project could be expanded by another 10MW to 40MW.

• 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 FY18F-FY20F. This stems from its growing cash generation while the capital outlays for projects under its asset ownership model will be largely funded by profits of EPCC contracts which are bundled together with the group’s partners.

• With Brent crude oil prices trading above US$80/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 - 17 Oct 2018