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.

• Our forecasts are maintained as Serba’s 9MFY18 results were within expectations, coming in at 70% of our FY18F earnings and 71% of consensus. As a comparison, 9MFY17 accounted for 74% of FY17 net profit.

• The group declared a 3QFY18 interim dividend of 1.7 sen which brings 9MFY18 DPS to 5.7 sen – 70% of our forecast and within expectation.

• Serba’s 9MFY18 net profit rose 21% YoY to RM279mil in tandem with a 20% revenue increase, underpinned by a 24% operation and maintenance (O&M) revenue increase. This largely stemmed from the Middle East region that accounted for 63% of 9MFY18 revenue vs. 61% in 9MFY17.

• However, the group’s 3QFY18 net profit decreased 19% to RM83mil due to seasonally lower O&M revenue, and lower engineering, procurement, construction and commissioning (EPCC) progress billings from the group’s water treatment plants in Kuala Terengganu, hydro-power plnats in Kota Marudu, Sbah and chlor-alkali plant in Tanzania.

• The QoQ results were further eroded by net interest cost almost doubling to RM18mil from the group’s expanding EPCC and O&M jobs as well as a RM7mil deferred tax provision.

• The seasonal impact is evident when comparison is made on a YoY basis wherein Serba’s 3QFY18 net profit instead rose 22% in tandem with an 18% revenue increase, driven largely by O&M activities in the Middle East, which accounted for 61% of group revenue, vs. 57% in 3QFY17.

• Serba’s revenue growth prospects remain bright, as the group’s order book has already reached its end-FY18F target of RM7.5bil, up 9% QoQ from RM6.9bil in 2QFY18, and 42% above RM5.3bil at end-FY17.

• Hence, we are positive on Serba’s O&M business model, which is still actively expanding its long-term recurring earnings profile by strategically leveraging its EPCC and ownership platform, similar to Dialog Group.

• Serba is currently trading at a grossly undervalued FY19F PE of 12x vs. over 30x for Dialog Group.

Source: AmInvest Research - 28 Nov 2018