Investment Highlights

• We maintain our BUY coverage on Serba Dinamik Holdings (Serba) with an unchanged 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 secured 13 operations and maintenance (O&M) contracts. These include 4 O&M contracts estimated at RM512mil, which were awarded to Serba's overseas operations involving maintenance, repair & overhaul of rotating and affiliated machineries together with specialist services.

• However, the group is unable to provide any value for the remaining 9 O&M jobs covering mainly domestic manpower resources and contractor services which are on a call-out basis.

• Since the beginning of the year, Serba has secured RM2.1bil contracts based on the job value estimates which were announced by the group.

• From an outstanding order book of RM5.3bil as at 31 Dec 2017 and RM6.9bil as at 30 June 2018, Serba appears to be on track to achieve its targeted net book of RM7.5bil (+42% YoY) by the end of this year. This represents 2x FY19F revenue and provides earnings visibility over the medium term.

• This rapid growth is still expected to be driven largely by the Middle East region, which is expected to relax its production quotas against the backdrop of improving crude oil prices.

• As such, we maintain FY18F-FY20F earnings which are premised on conservative group revenue growth rates of 12%- 16%.

• While the rising order book will mean additional working capital requirements, Serba’s net gearing is expected to gradually improve, 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, notwithstanding the group’s effective capital commitment of RM1.2bil.

• With Brent crude oil prices trading within the US$70- 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 - 26 Oct 2018