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.

• Serba is acquiring a 4-acre industrial land in Lumut for RM8mil cash or RM46 psf for its 42%-owned associate E&E Gas, which is building an onshore liquefied natural gas (LNG) distribution infrastructure facilities.

• This will be undertaken by Serba acquiring the entire stake in Sg Rek Sdn Bhd, which owns the land.

• Recall that Serba swapped a 10-acre residential land in the same vicinity in October last year for RM16mil or RM37 psf for a 42% equity stake in E&E Gas.

• The group also subscribed for 10mil redeemable convertible preference shares for RM10mil cash in E&E, which has awarded the RM333mil engineering, procurement, construction and commissioning works to build the LNG facilities to Serba.

• The higher premium for the new land stems from the seafronting requirement for Serba to lay the pipeline to the jetty which is being built.

• Also, Serba does not need to pay for the conversion of the land's residential status to industrial.

• The cost of the land is not included in the construction cost as Serba plans to lease it to E&E over a 15-year operation at a gross rental yield of 10%. This will have minimal earnings accretion of RM0.4mil, assuming interest cost at 5%.

• Hence, we are neutral on this development which will cause a slight increase to the group's FY19F net gearing of 0.2x. Also, this land investment is part of the group's execution plan for the LNG facilities.

• 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 - 18 Mar 2019