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. This valuation is before the group’s proposed 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.

• Serba secured 2 contracts worth US$163mil (RM683mil) comprising: (1) an engineering, procurement, construction and commissioning (EPCC) contract from State Concern Turkmengas to deliver equipment and SCADA automation to a 214km gas pipeline in Turkmenistan; and (2) a firm 3-year operation and maintenance (O&M) job to repair, overhaul and maintain pumps, compressors and other rotating equipment from Revenue International LLC in Oman.

• The group also secured an EPCC job for a boiler project at Asean Bintulu Ferilizer in Bintulu, Sarawak and 2 additional O&M contracts: the provision of mechanical rotating maintenance services to SEA Hibiscus S/B and Petronas on a firm 3-year period and a 1-year extension option. These O&M contracts, which are on a “call-out” basis, have no specific value yet depending on the clients’ requirements.

• Based on the firm value of contracts which Serba is estimated to have secured since the beginning of this year, the RM2.4bil that has been announced to date accounts for 60% of the group’s FY19F revenue. We estimate this has raised Serba’s outstanding order book by 8% from 2QFY19 to RM9.7bil currently.

• 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.

• While 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, we expect the EPS impact to be mitigated by value-accretive new order intakes.

• 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 - 17 Oct 2019