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.

• Serba has secured 8 operations and maintenance (O&M) contracts, and 3 engineering, procurement, construction and commissioning (EPCC) jobs, the first that the group has announced this year. The value of the 3 overseas jobs based in the United Arab Emirates (UAE), Uzbekistan and Qatar are estimated to be worth RM448mil (US$110mil).

• However, Serba’s 6 O&M jobs locally from Petronas Carigali, Pengerang Refining Company, Pengerang Petrochemical Company, Petronas Dagangan and Malaysia LNG do not have any estimated contract values given that they are on a call-out basis.

• We understand that Serba’s outstanding order book of RM7.5bil during the 3QFY18 analyst briefing has reached RM8.3bil currently with these new jobs, and is on track to reach its target of RM10bil by end-FY19, which translates to an impressive growth of 33% YoY.

• This implies that the group is expecting an FY19F revenue growth of 18%–20%, which is above our current estimate of 16%. In 4Q2018, the group secured confirmed contract values of RM845mil, up 15% QoQ and 7.6x YoY.

• Management expects the continuation of strong revenue growth this year driven by growing demand in the Middle East and Southeast Asia, spearheaded by the UAE 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 is not expected to have any impact to the group’s FY18F revenue growth of 20%. Instead, the commencement should have an incremental boost to our FY19F growth assumptions.

• 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 11x vs. over 30x for Dialog Group.

Source: AmInvest Research - 13 Feb 2019