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.

• Our FY19F–FY20F forecasts are maintained as Serba’s FY18 revenue and net profit were within our and consensus expectations. We introduce FY21F earnings premised on a slower revenue growth assumption of 9% given the group’s enlarged base.

• The group declared a 4QFY18 interim dividend of 2.3 sen (+0.7 sen QoQ) which brings FY18 DPS to 8 sen, translating to a payout ratio of 30% that was also within our expectations.

• Serba’s FY18 net profit rose 26% YoY to RM388mil in tandem with a 21% revenue rise to RM3.3bil, underpinned by a 25% operation and maintenance (O&M) revenue growth. This largely stemmed from the Middle East region that accounted for 62% of FY18 revenue vs. 59% in FY17 and supported by a rapid expansion in Turkmenistan, which surged 71% YoY.

• As we have guided in our updates, the group’s 4QFY18 net profit climbed 31% to RM109mil following a 3QFY19 seasonal decrease of 19%. This stemmed largely from the revenue increase of 27% to RM978mil.

• During 4QFY18, 84% of the QoQ revenue growth was derived from the O&M segment, and to a lesser extent, the engineering, procurement, construction and commissioning (EPCC) division which rebounded by 50% after a lumpy QoQ decline of 13% in 3QFY18.

• We understand that Serba’s outstanding order book of RM7.5bil revealed during the 3QFY18 analyst briefing has reached RM8.3bil currently, 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 unchanged assumption of 16%.

• 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 89% of the group’s FY18 revenues. Our only concern lies in the rising net gearing of 0.45x as at 4QFY18 from 0.29x in 4QFY17 due to the group’s expansion programme, which management affirm does not require any equity raising exercise. We will provide further updates after the analyst briefing today.

• 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 – Serba’s closest peer in the oil and gas sector.

Source: AmInvest Research - 28 Feb 2019