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–FY21F forecasts are maintained as Serba’s 1QFY19 results came in within expectations, accounting for 24% of our and street’s FY19F net profit.

• The group declared a first interim dividend of 2.3 sen (+0.4 sen YoY), translating to a payout ratio of 30% that also was in line with our expectations.

• Serba’s 1QFY19 net profit rose 21% YoY to RM112mil in tandem with a 35% revenue rise to RM3.3bil, underpinned by both the operation and maintenance (O&M) and engineering, procurement and construction (EPCC) segments.

• The YoY group revenue growth stemmed from the O&M segment (+35%), and to a lesser extent, the EPCC division (+18%). Geographically, this growth was largely driven by operations in Malaysia (+53% YoY) and Indonesia (+11% YoY), and to a lesser extent, the Middle East region (+21% YoY) that caused its share of revenue to decrease to 59% in 1QFY19 from 66% in 1QFY18.

• However, on a QoQ comparison, 1QFY19 net profit rose slightly by 3% on flattish revenue, which is commendable given that 4Q tends to be the group’s strongest performance. However, 1QFY19 pre-tax profit fell by 5% due to an 83% drop in interest income from lower fixed deposits used for capex. This was offset by a normalisation of effective tax rate to 10% from 16% in 4QFY18, which included deferred tax provisions.

• While Serba’s outstanding order book was flat QoQ at RM8.3bil (of which O&M accounted for 73% and EPCC for the remainder), management is still aiming 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%.

• Our only concern lies in the rising net gearing of 0.5x as at 1QFY19 from 0.3x in 1QFY18 due to the group’s expansion programme, which management affirm does not require any equity-raising exercise.

• 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 13x vs. over 30x for Dialog Group – Serba’s closest peer in the oil and gas sector.

Source: AmInvest Research - 30 May 2019