Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with unchanged forecasts and 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.

• From the analyst briefing today, we highlight the following salient points:

• The delays in the Perak hydropower dam project appears to be leading to a cancellation given that the Sustainable Energy Development Authority Malaysia (Seda) has not extended the power purchase agreement against the backdrop of the Pakatan government calling off other such contracts which have not reached commencement stage. Recall that Serba proposed to acquire a 40% stake in 3 companies – Maju Renewable Energy Sdn Bhd, Maju RE (Talang) Sdn Bhd and Maju RE (Temenggor) Sdn Bhd – from Maju Holdings Sdn Bhd, which is controlled by Tan Sri Abu Sahid Mohamed, for a combined RM25mil last year. These companies have been granted approval by Seda to develop hydro power plants with a total of 60MW generating capacity within the Temenggor and Belum Forest Reserves in Perak.

• As Serba has not invested yet into the hydropower project, the group will not incur any impairments while its current order book of RM8.3bil has replaced the engineering procurement, construction and commissioning (EPCC) contract of RM560mil to build the power plants with fresh overseas operation & maintenance (O&M) jobs.

• If the government were to reopen this project for a fresh tender in the future, Serba plans to directly bid with other stakeholders.

• Growth for group’s overseas operations, which account for 72% of FY18 group revenue, is expected to be driven by stronger growth from Central Asia and Africa while being underpinned by the Middle East.

• After the imposition of the Labuan tax rate at 3% from a ceiling of RM20K, the group expects its FY19F–FY21F effective tax rate at 10%–11% (vs 10.3% in FY18), in line with our own unchanged assumptions.

• With a gross gearing cap of 1x vs. 0.8x currently, management reaffirms that there is no requirement for an equity-raising exercise with the issuance of RM800mil sukuk programme in October last year for working capital and debt refinancing.

• Serba is currently trading at a grossly undervalued FY19F PE of 12x vs. over 30x for Dialog Group. We remain positive on Serba’s O&M business model, which is expanding its long-term recurring earnings profile by strategically leveraging its EPCC and asset ownership platform.

Source: AmInvest Research - 28 Feb 2019