Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with unchanged forecasts and diluted sum-of-parts-based (SOP) fair value of RM3.000/share, which implies an FY20F PE of 18x — 42% of Dialog’s 31x, its closest peer in Malaysia. This valuation has been adjusted for the group’s 1-for-2 share split, 2-for-5 bonus issue and 2 warrants for 5 shares.

• We view the 6% drop in share price since last Friday against the backdrop of heightened Middle East tensions as opportunities for investors to further add to their positions. Even though 61% of Serba’s 9MFY19 revenue stems from the Middle East, the group does not have any operations in Iran or Iraq.

• Furthermore, US President Donald Trump has indicated signs of de-escalation of hostilities, saying that Iran "appears to be standing down" after firing missiles at Iraqi air bases housing US forces in Iraq which did not result in any US or Iraqi casualties while the bases suffered only minimal damage, based on initial assessments.

• Given the high investments by local, US and European companies in the Middle East, we expect demand for operation and maintenance activities, which are Serba’s bread and butter, to remain firm.

• While the Iran-backed Houthi drone attack in Saudi Arabia in September last year did not lead to significant new orders for Serba, we remain optimistic that its current established presence in Saudi Arabia, which accounts for 5% of Serba’s 9MFY19 revenue, will continue to garner additional job scope.

• Recall that the group grew at above-peer revenue growth of 37% for 9MFY19, 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.

• Since the beginning of 2019, 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 13x vs. over 30x for Dialog Group – Serba’s closest peer with a recurring income profile in the oil and gas sector.

Source: AmInvest Research - 9 Jan 2020