Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with an unchanged 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 forecasts have been marginally raised following Serba’s analyst briefing yesterday, which highlighted the following:

• Our forecast assumptions translate to a conservative FY20F earnings growth of 15%, on the lowest end of management guidance which maintains Serba’s ambitious FY20F growth target of 15%–20% for both revenue and net profit.

• The group does not see any substantive Covid-19 impact directly to the supply chains of the oil & gas sector, given that the quality of China’s manufacturers for major turbines has yet to be recognised by Petronas and other oil majors. The indirect impact stems from the sharp drop in global oil demand, which has dented prices and sentiments. However, the deferment of IT-related and electronic components together with restrictions on staff travel do have some minimal impact to the group at this stage.

• The group’s highly ambitious FY20F order book growth of 50% YoY to RM15bil, implies aggressive new order wins of RM10bil (43% YoY) given a projected depletion of RM5bil. Management is positive on securing these additional job orders given rising opportunities in the Middle East, Central Asia and Petronas’ group-wide master service agreement amid the recurring nature of operation and maintenance activities, which accounted for 86% of FY19 revenue.

• Datuk Mohd Karim, the founder who owns 23% of Serba’s equity has recently acquired a 53% equity stake in Kumpulan Powernet (Powernet), which subsequently secured a US$16mil (RM66mil) Laos mini hydro-power project with a capacity of 8MW. He indicated that Powernet has its own key management structure with independent overseas contacts which do not coordinate with Serba in bidding for jobs. As Serba is aiming for larger projects with capacities above 50MW, the company did not tender for this small-scale Laos project.

• Serba’s recent acquisition of University Malaysia of Computer Science & Engineering (UNIMY) from Prestariang for a relatively small RM2.5mil cash was to provide specialized training for staff and leverage on a rising technical base with R&D capabilities to penetrate new markets.

• We expect a potential equity placement of up to 10%, which has been approved by the AGM, to reduce the group’s FY20F net gearing from 0.9x to 0.5x with a potentially mild FY21F EPS dilution as Serba may register higher earnings than our current estimates.

• Even so, 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 - 3 Mar 2020