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 Group’s 30x, the company’s closest peer in Malaysia.

• The Star reported that Serba’s founder and substantial shareholder Datuk Mohd Abdul Karim and his business partner have acquired a combined 30% equity interest in fabric-manufacturer Kumpulan Powernet from substantial shareholders SSF Home Builder Sdn Bhd and Datuk Lee Chong Hoon – the brother of national badminton player Datuk Lee Chong Wei.

• We are glad that Karim is acquiring the stake in his own personal capacity and not under Serba, which has a different business model and does not complement Powernet’s operations. Powernet registered a 1QFY19 loss of RM2mil following persistent losses over the past 9 years.

• The Edge Financial Daily also quoted Karim as saying that Serba is targeting FY19F net profit growth of 10% to 12% during the group’s annual general meeting yesterday. This is substantively lower than our and consensus’ FY19F earnings growth of 21%–22%.

• Our channel checks reveal that the financial daily could have misquoted Karim given that the group’s FY19F revenue target of 15%–20% is in line with our assumption of 19%, vs. 35% YoY growth in 1QFY19.

• We understand that the range of 10%–12% quoted in the report refers to Serba’s net profit margin, which is also in line with our forecasts. Hence, our forecasts remain intact and do not need to be revised at this juncture.

• Serba remains on track to reach management’s outstanding order book target of RM10bil by end-FY19F, which implies an impressive order book growth of 33% YoY. This means that the FY19F revenue growth of 15%–20% should be achievable. 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.

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

Source: AmInvest Research - 21 Jun 2019