Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with unchanged forecasts and diluted sum-of-partsbased (SOP) fair value of RM3.00/share, which implies an FY20F PE of 18x — 42% of Dialog’s 31x, its closest peer in Malaysia.

• Serba Dinamik has officially refuted The Edge Financial Daily’s report that the group is in a preliminary stage of negotiations with the Sarawak state government to acquire Sarawak-based Brooke Dockyard and Engineering Works Corp.

• Recall that Brooke Dockyard, which has a major fabricator licence from Petronas with an annual capacity of 25,000 tonnes on 20-acres of yard space in Kuching, Sarawak, is able to undertake heavy engineering works for oil & gas offshore modules, substructures and ship building.

• While such an acquisition could strategically transform Serba’s offshore fabrication and operation & maintenance capabilities, we would have been negative on such a development given the potentially high price tag, which channel checks had indicated was at RM150mil.

• Additionally, as Brooke Dockyard was reportedly in financial distress with losses incurred on a contract, we are doubtful that the company is able to secure any major contracts over the near to medium term from Petronas, which requires good and timely execution from its contractors.

• Additionally, Serba’s high net gearing of 0.7x in 3QFY19 is likely to rise further to 0.8x by 4QFY19 due to working capital requirements. Hence, the group is likely to raise additional equity to finance such an acquisition.

• Given that the yard is unlikely to generate any substantial profitability over the next 1–2 years on the lack of outstanding order book, an acquisition by Serba would have been value-destructive.

• As such a possibility has been averted, we remain sanguine of Serba’s earnings growth prospects. With an outstanding order book that is already reaching RM10bil currently (+33% YoY), management is still aiming for topline and earnings growth of 10%–15% for FY20F, supported by an ambitious order book target of RM15bil (+50% YoY).

• 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 - 11 Feb 2020