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 9MFY19 results came in within expectations, accounting for 75%–76% of our and street’s FY19F net profit vs. 72–74% for the first 9 months of the past 2 years.

• The group declared a third interim dividend of 1.11 sen (-0.54 sen YoY) which raised 9MFY19 DPS by 7% YoY to 6.1 sen, translating to a payout ratio of 25%, slightly below our assumption of 30%, based on Serba’s policy.

• Serba’s 9MFY19 net profit rose 28% YoY to RM356mil in tandem with a 37% revenue rise to RM3.2bil, underpinned by both the operation and maintenance (O&M) and engineering, procurement, construction and commissioning (EPCC) segments. This was partly offset by higher depreciation (+61%), increased sukuk-driven net interest cost (+2.2x) and effective tax rising by 4ppt 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 (+50%) benefiting from the construction of the US$78mil Tanzanian chlor-alkali factory and RM218mil Kota Marudu hydropower project in Sabah.

• Geographically, this growth was largely driven by operations in Malaysia (+42% YoY) followed by the Middle East region (+26% YoY) that caused its share of revenue to decrease to 61% in 9MFY19 from 64% in 9MFY18.

• On a QoQ comparison, 3QFY19 net profit decreased by 13% to RM113mil in tandem with seasonal revenue decline of 8% in Malaysia, the Southeast Asia, Middle East and Central Asia.

• Since the beginning of this year, the group has secured fresh contracts that have raised Serba’s outstanding order book by 33% YoY to RM10bil currently – already reaching 2019 yearend target. For FY20F, management is aiming for topline and earnings growth of 10%–15%, supported by an even more ambitious order book target of RM15bil (+50% YoY).

• While the rise in Serba’s net gearing to 0.7x in 3QFY19 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.

• 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 - 26 Nov 2019