Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with an unchanged sum-of-parts-based (SOP) fair value of RM6.50/share, which implies an FY19F PE of 20x — 33% below Dialog’s 30x, the company’s closest peer in Malaysia.

• Concerns have arisen on Serba since Budget 2019 removed the RM20,000 tax ceiling on Labuan-based companies, which led to it bearing the existing tax rate of 3%. In 9MFY18, Serba’s effective tax rate was 7.9% as 72% of the group’s revenue derived from outside of Malaysia, which bears minimal tax rates as its overseas operations are registered in Labuan.

• We note that our current FY18F-FY20F effective tax rate assumption of 12% is already higher than Serba’s 9MFY18 rate. Our tax assumption is similar to 11.9% in FY17 which bore prior year tax adjustments and deferred tax provisions. Nevertheless, we have conservatively raised the group’s tax assumption by 2ppts to 14% for FY19F–FY20F according to the new budget.

• However, management expects the continuation of strong revenue growth this year driven by growing demand in the Middle East and Southeast Asia, spearheaded by the United Arab Emirates and Qatar. Most of the growth will be underpinned by Serba’s operation and maintenance services, which account for 85% of the group’s FY18F revenues.

• Even the delay in the commencement of the RM560mil EPCC contract to build 60MW hydro power plants within the Temenggor and Belum Forest Reserves in Perak from mid- 2018 to 2Q2019 did not have any impact to the group’s FY18F revenue growth of 20%. Instead, the commencement should have a slight incremental boost to our FY19F growth assumptions.

• Recall that Serba’s outstanding order book of RM7.5bil during the 3QFY18 analyst briefing has already reached its end-FY18F target, and likely to surpass it in 4QFY18. Management is now aiming for an outstanding order book of RM10bil by end-FY19, which translates to an impressive growth of over 30%.

• This is achievable given that the current order book of RM7.5bil represents an even stronger 42% YoY growth from RM5.3bil at end-FY17. This implies that the group is expecting an FY19F revenue growth of 18%–20%, which is above our current estimate of 16%.

• Conservatively, we have raised Serba’s FY19F revenue growth assumptions to 18%, which is on a similar trajectory in FY18F. All in, we have marginally adjusted Serba’s FY19F–FY21F EPS as the 2ppt increase in effective tax rate assumptions is fully offset by our 2ppt increase in FY19F revenue growth.

• We highlight that Dialog is unlikely to raise further equity in the medium term given that its FY18F net gearing is only 0.3x while any EPCC jobs will be supported by clients’ initial deposits. From the RM834mil raised from Serba’s IPO in 2017 and private placement early last year, the group has only utilised 40% to date while the balance will be progressively spent by 2020.

• Notwithstanding the group’s effective capital commitments of RM1.2bil, Serba’s net gearing is expected to gradually decline, from 0.7x in FY16 and 0.5x in FY17 to 0.3x–0.4x in FY18F–FY20F due to its growing cash generation while the capital outlays for projects under its asset ownership model and Pengerang Eco-Industrial Park development will be largely funded from the profits of the EPCC contracts which are bundled together with its partners.

• Hence, we remain 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 - 17 Jan 2019