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.

• Our FY19F–FY21F forecasts are maintained as Serba’s FY19 net profit of RM497mil came in within both our and street’s expectations.

• However, this includes an interest charge of RM52mil for the early redemption of RM800mil Sukuk financing which was issued in 2018. Excluding this one-off item, the core net profit of RM549mil would have exceeded our and market forecasts by 16%.

• The group declared a fourth interim dividend of 1.4 sen (-0.39 sen YoY) which caused FY19 DPS to decline 0.5 sen to 7.5 sen, translating to a payout ratio of 47%, in line with Serba’s minimum policy of 30%.

• Serba’s 4QFY19 net profit rose 25% YoY to RM141mil in tandem with a 30% revenue rise to RM1.3bil, underpinned by both the operation and maintenance (O&M) and engineering, procurement and construction (EPCC) segments. The early Sukuk redemption caused 4QFY19 interest costs to surge by 3.9x QoQ to RM104mil, partly offset by reversal of Labuan tax provisions.

• The YoY group revenue growth stemmed from the O&M segment (+33%), and to a lesser extent, the EPCC division (+47%) 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 60% in FY19 from 62% in FY18.

• Serba’s outstanding order book has risen by 43% YoY to RM10.7bil currently – exceeding its 2019 year-end target of RM10bil. For FY20F, management is aiming for topline and earnings growth of 10%–15%, supported by an ambitious order book target of RM15bil (+50% YoY).

• As highlighted in our earlier reports, Serba’s net gearing has risen to 0.8x in 4QFY19 from 0.5x in 4QFY19. While this 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 an unjustified FY20F PE of 9x vs. over 30x for Dialog Group – Serba’s closest peer with a recurring income profile in the oil and gas sector.

Source: AmInvest Research - 27 Feb 2020