Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (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 acquired an additional 10% in Green & Smart Holdings Plc (GSH), listed on the London Stock Exchange’s AIM Market, for RM13mil (£2mil), from a share sale by K2MV and GSH’s CEO Saravanan Rasaratnam and its COO Navindran Balakrishnan. As Serba has acquired an earlier 15% stake in GSH for £3.2mil (RM17mil) by subscribing for its private placement exercise on 19 July 2018, the group’s stake in GSH has risen to an associate 25%.

• The purchase consideration, which is just 3% above the market price, is reasonable despite a high prospective PE of 18x for FY Sep 2019 as the arrangement includes the first right of refusal for any future engineering, procurement, construction and commissioning (EPCC) contracts from GSH.

• GSH’s core business is power generation from two biogas power plants (built from its own proprietary technology) which use biogas from palm oil effluents to generate electricity for Tenaga Nasional or nearby palm oil mills. It also undertakes EPCC works for wastewater treatment plants and consultancy services in the renewable energy sector.

• Serba has already constructed 2 biogas plants for GSH, which subsequently awarded the group with an EPCC contract to supply, design, fabricate, deliver, install, test and commission a 2.7MW-per-hour biogas power plant in Teluk Intan, Perak. The contract began on 8 Feb 2018 and is scheduled for completion by 7 Dec 2018.

• GSH is planning to develop 3 more biogas plants with a contract value of RM49mil and may embark on joint ventures with plantation owners for other similar plants, potentially worth up to RM40mil. Assuming a gross profit margin of 15%, we estimate that the prospective construction profit alone should be sufficient to repay the additional equity investment and supported by the group’s low net gearing of 0.3x.

• With GSH’s existing contracts and capabilities, Serba aims to expand its EPCC capabilities into the Indonesian plantation sector. As only 94 palm oil mills or 21% of the current 454 palm oil mills in Malaysia are equipped with biogas facilities, we view substantive opportunities for further order book accretion.

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

Source: AmInvest Research - 23 Nov 2018