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 planning to raise a sukuk issuance worth US$200mil–250mil (RM826mil–RM1bil) for a tenure of 3 years to refinance its existing foreign loans and international projects.

• The group’s foreign debt accounts for 40% of gross debt of RM1.7bil as at 31 December 2018, of which RM496mil (US$120mil) is scheduled to be repaid this year.

• Hence, the group is earmarking US$80mil–US$130mil for engineering, procurement and construction projects in Laos, Tanzania and Uzbekistan, as well as working capital for Middle Eastern operation and maintenance contracts.

• While the group has already issued a RM800mil sukuk programme in October last year and retained the outstanding proceeds of RM419mil from its RM407mil IPO in February 2017 and RM427mil private placement in January 2018, this new foreign-denominated debt issue circumvents the conversion of the MYR, which requires Bank Negara approval.

• S&P Global Ratings has assigned a preliminary ”BB-" rating for long-term issuer credit and guarantees. Fitch Ratings has accorded a long-term issuer default rating of ”BB-” with a stable outlook. These could mean an interest rate of 5.5%, higher than Serba’s average gross interest rate of 5.1% in FY18.

• We are neutral on this development, which is part of the group’s financing programme for international expansion. While net gearing has risen to 0.45x as at 4QFY18 from 0.29x in 4QFY17 due to the pipeline of multiple projects, management reaffirms that Serba does not require any equity-raising exercise.

• 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.

• 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 - 24 Apr 2019