Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with a 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 is investing RM26mil for a stake in E&E Gas (EEG) which could be from 42% to 51%, depending on the potential conversion of 10mil new redeemable convertible preference shares (RCPS). The consideration will be via a 10-acre leasehold land valued at RM16mil or RM37 psf and cash of RM10mil for the RCPS.

• We understand that EEG intends to redeem the RCPS, with the RM10mil cash to be used for its working capital. The market value of the land is RM18mil or RM42 psf by valuer Fadzilah & Fikri Sdn Bhd. The land, which is strategically near Lumut port, was bought by Serba last year and transferred to the JV at cost.

• Simultaneously, EEG has awarded an RM333mil engineering procurement, construction and commissioning (EPCC) contract to Serba for the building of an LNG plant with a capacity of 500,000MT per annum in Lumut over 2 years. This supports the group’s aim of achieving an outstanding order book of RM7.5bil by the end of this year, from RM6.9bil as at 30 June 2018.

• The off-taker for the plant plans to use mini regas trucks to transport to customers instead of gas pipeline infrastructure. EEG, which provides integrated mid-scale LNG infrastructures, secured an MoU with the off-taker in 2014, which later lapsed and was revived.

• Based on the group’s average EPCC gross profit margin of 15%, the construction profit alone translates to 1.9x investment cost of RM26mil. Beside the EPCC profit, Serba will have the first right of refusal for any recurring O&M contracts from this project. As we have already incorporated a 16% FY19F revenue growth assumption, we maintain our forecasts for now.

• We understand that a steady utilization rate of 1/3 of the plant’s capacity can generate a threshold project IRR of 15%, while the group aims to achieve a utilization rate of over 50% with other customers. Assuming a conservative project IRR of 15%, WACC of 5% over 10 years and depreciation over 15 years, we estimate that this associate-level asset-based recurring income model could add a minimal 2% to FY20F net profit upon completion and generate an NPV of RM75mil – 1% of Serba’s current market cap.

• Hence, we remain positive on this development and the group, which is still actively expanding its long-term recurring earnings profile by strategically leveraging its EPCC and ownership platform, in a similar business model to Dialog Group. We note that the size of the recent investments is relatively small and should be easily supported by the group's low 0.3x net gearing.

• Serba is currently trading at a grossly undervalued FY19F PE of 12x vs. over 20x for Dialog, MMHE and Sapura Energy.

Source: AmInvest Research - 1 Nov 2018