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, Serba’s closest peer in Malaysia.

• Serba secured an engineering, procurement, construction and commissioning (EPCC) contract worth RM1.1bil (US$250mil) to build a 90-tonne/day chlorine processing plant and a 26MW/h steam turbine independent power plant over 2 years for Hazarasp Chlor Alkali LLC FC at the Khorezm region in Uzbekistan.

• The group also secured 2 Petronas Carigali contracts to undertake operation and maintenance (O&M) services for a Weir gas compressor and a Capstone microturbine generator. While the O&M contracts are on a “call out” basis with no specific value, the estimated value could reach RM70mil.

• Based on the value of contracts which Serba has estimated to have secured since the beginning of this year, the RM1.7bil which has been announced to date accounts for 44% of the group’s FY19F revenue.

• Including 2QFY19 revenue recognition, we understand that the new EPCC job has raised Serba’s outstanding order book by 8% QoQ from RM8.3bil as at 1QFY19 to RM9bil currently, of which 67% stems from the O&M segment and the balance from EPCC.

• Given the pace of new contract wins, we believe that Serba remains on track to reach management’s outstanding order book target of RM10bil by end-FY19F. This implies an impressive order book growth of 33% YoY and a potential FY19F revenue growth of 18%–20%, which is above our conservative assumption of 16%. 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.

• 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. We expect the group’s 1HFY19 results, which will be announced on 22 August, to be within expectations.

Source: AmInvest Research - 14 Aug 2019