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

• From the analyst briefing today, these are the key highlights:

• While founder and substantial shareholder Datuk Mohd Abdul Karim has launched a mandatory general offer in his personal capacity for the remaining shares in building products/property developer Sarawak Consolidated Industries (SCIB), he will not be in an executive position in the group. With an effective 49% equity stake in SCIB, he will likely be a non-executive chairman.

This is similar to his private vehicle fabric-manufacturer Kumpulan Powernet, where Abdul Karim has a 20% equity stake and holds a non-executive deputy chairman role. As he will be nominating his own CEO for SCIB, Abdul Karim will remain fully focused and committed to his executive group managing director/CEO responsibilities for Serba.

• Serba will remain focused in expanding its O&M and EPCC businesses while avoiding volatile and cycle-driven upstream exploration and production operations. While the group has multiple geographical presence across the globe (Exhibit 1), Serba does not intend to venture into the China market given the need to build a marketing network and unfamiliarity with a country which has its own strong capabilities.

• Serba will continue to prefer O&M jobs given its recurring and longer term revenue profile as compared with lumpy EPCC jobs which currently have lower EBITDA margins (15% vs. 18% for O&M) due to intense market competition.

• Management appears confident that the group’s order book target of RM10bil is likely to be achieved before the end of the year, 11% from RM9bil currently and 33% from RM7.5bil in 4QFY18.

Growth momentum will remain strong next year with the completion of the Bintulu integrated energy service hub in 1Q2020 given the award of Petronas Carigali’s maintenance, construction and modification for the Miri crude oil terminal and Asam Paya onshore facilities, Bintulu integrated plants and Samalaju Industrial Park.

• The rise in Serba’s net gearing to 0.6x in 2QFY19 from 0.5x in 1QFY19, and could reach 0.8x by the end of the year may lead to an equity-raising exercise in the form of perpetual securities or private placement. However, we expect any potential equity placement to be partly mitigated by the group’s strong valueaccretive revenue growth amid commencement of the Pengerang Integrated Development’s property launches.

• Nevertheless, Serba is currently trading at a grossly undervalued FY20F PE of 12x vs. 34x for Dialog Group – Serba’s closest peer with a recurring income profile in the oil and gas sector.

Source: AmInvest Research - 23 Aug 2019