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 RM3.00/share, which implies an FY20F PE of 18x — 42% of Dialog’s 31x, its closest peer in Malaysia.

• The Edge Financial Daily reported that the group is in a preliminary stage of negotiations with the Sarawak state government to acquire Kuching-based Brooke Dockyard and Engineering Works Corp.

• Established in 1912, Brooke Dockyard has undergone a few rounds of organizational restructuring until Brooke Dockyard become a fully-owned government statutory body in 1977. It has 2 yards — the first is the 20-acre Sejingkat Yard near the Senari Port and the second facility is Demak Yard, also covering 20 acres, at Demak Laut Industrial Estate Phase III.

• Brooke Dockyard, which has a major fabricator licence from Petronas with an annual capacity of 25,000 tonnes, is able to undertake heavy engineering works for oil & gas offshore modules, substructures and ship building.

• Even though Serba has its RM259mil Bintulu Integrated Energy Hub in Tanjung Kidurong to service engineering, procurement, fabrication, operation & management projects in Sarawak, this facility does not have drydock capabilities to undertake vessels or large topside modules.

• Hence, Brooke Dockyard could strategically transform Serba’s offshore fabrication capability to a new level while complementing its operation and maintenance activities for Sarawak and the Middle East.

• We understand that the financially distressed dockyard, which has incurred RM100mil losses on a contract, is being offered to Serba at a pricey RM150mil. Brooke Dockyard’s debt has not been revealed at this stage.

• Measured against its yard size, the offer price translates to RM86 psf – this is 54% above Malaysia Marine and Heavy Engineering’s RM56 psf currently based on its market capitalisation.

• At the current offer price, we would not be in favour of Serba acquiring Brooke Dockyard unless the acquiree has managed to secure substantial contracts to support a valueaccretive proposition. However, we are skeptical that Petronas would be willing to award huge contracts unless Brook Dockyard had demonstrated good and timely execution on its projects.

• Serba is currently trading at an 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 - 10 Feb 2020