Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with unchanged forecasts and sum-of-partsbased (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.

• The group has announced a proposal for a 1-for-2 share split, 2-for-5 bonus issue and 2 warrants for 5 shares which could expand its share base by 2.7x to 4bil.

• The exercise price of the 5-year warrants will be determined later based on a 30% premium to its theoretical ex-all price of Serba shares based on the 5- day volume weighted average.

• Following the completion of the bonus and share split, Serba’s theoretical share price could drop to a more affordable RM2.10/share, which could lead to more retail interest and provide additional trading liquidity.

• Hence, we are mildly positive on the bonus and share split proposal, and neutral on the warrant issue as management’s rationale is to reward shareholders with an opportunity to increase their stakes if the share price were to appreciate above the 30% premium to its theoretical value.

• This will also provide an alternative avenue for the group to raise capital given that Serba’s net gearing has risen to 0.6x in 2QFY19 from 0.5x in 1QFY19, and could reach 0.8x by the end of the year.

• Assuming full exercise of the 881mil warrants at RM2.60/share (30% premium to our theoretical price of RM2.00/share), the proceeds of RM2.6bil could reverse Serba to a FY20F net cash balance of RM540mil from a net gearing of 0.6x.

• Nevertheless, we believe that unless the proposed warrant issue later is in the money, the group may undertake 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 value-accretive 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 - 3 Sept 2019