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 — 44% below Dialog’s 36x, the company’s closest peer in Malaysia.

• Our FY19F–FY21F forecasts are maintained as Serba’s 1HFY19 results came in within expectations, accounting for 51% of our and street’s FY19F net profit vs. 50–52% for the first halves of the past 2 years.

• The group declared a second interim dividend of 2.7 sen (+0.4 sen QoQ) which raised 1HFY19 DPS by 24% YoY to 5 sen, translating to a payout ratio of 30% that also was in line with our expectations.

• Serba’s 1HFY19 net profit climbed 24% YoY to RM243mil in tandem with a 35% revenue rise to RM2.1bil, underpinned by both the operation and maintenance (O&M) and engineering, procurement and construction (EPCC) segments. This was partly offset by higher depreciation (+61%), increased sukukdriven net interest cost (+3x) and effective tax rising by 4.8%– point due largely to the Labuan tax regime change.

• The YoY group revenue growth stemmed from the O&M segment (+33%), and to a lesser extent, the EPCC division (+49%) benefiting from the construction of the US$78mil Tanzanian chlor-alkali factory and the RM218mil Kota Marudu hydropower project in Sabah.

• Geographically, this growth was largely driven by operations in Malaysia (+48% YoY) followed by the Middle East region (+26% YoY) that caused its share of revenue to decrease to 59% in 1HFY19 from 64% in 1HFY18.

• On a QoQ comparison, 2QFY19 net profit rose by 16% to RM130mil in tandem with similar revenue growth driven by a stronger EPCC growth of 32% and O&M of 11%.

• Since the beginning of this year, the RM1.7bil contracts, which have been announced to date, account for 44% of the group’s FY19F revenue. These have raised Serba’s outstanding order book by 8% QoQ to RM9bil currently – on track to the year-end target of RM10bil.

• The rapid pace of order book growth and EPCC project progress have raised Serba’s net gearing to 0.65x in 2QFY19 from 0.5x in 1QFY19, and could reach 0.8x by the end of the year. Nevertheless, management expects Serba’s operational cash flows and maiden sales of Pengerang property development by the end of this year to cap net gearing at 1x.

• Serba is currently trading at a grossly undervalued FY20F PE of 12x vs. over 30x for Dialog Group — Serba’s closest peer with a recurring income profile in the oil and gas sector.

Source: AmInvest Research - 23 Aug 2019