Investment Highlights

• We maintain our SELL call on Serba Dinamik Holdings (Serba) with an unchanged sum-of-parts-based (SOP) fair value of RM1.05/share, based on a 30% premium to its FY19 book value.

• Our forecasts are maintained for now as a potential increase of 16%–18% in FY21F–FY22F EPS from the recent US$1.8bil (RM7.7bil) contract to design, engineer, procure and construct (EPC) an innovation hub, academic campus, apartments, hotels and IT centre over 4 years in Abu Dhabi, the UAE could be partially offset by a decline in O&M revenue growth due to the Covid-19 pandemic amid a precipitous decline in oil prices and demand.

• The salient highlights of the teleconference yesterday with management are as follows:

• Since the start of the Covid-19 pandemic in February this year, the group has not experienced any requests from clients to terminate contracts or renegotiate prices. Also, there have been no requests to delay maintenance scheduled or work progress.

• While the movement control order in Malaysia and restrictions in the Middle East have slightly delayed the group’s work productivity, management does not expect any substantive impact to overall operational costs at this juncture.

• The UAE construction project’s risks are mitigated by the capping of late completion penalty to 10% of contract value, which is below the group’s expected gross margin target of 12%. Additionally, management is confident of delivery within 4 years for a usual 3-year project commencing on 14 May 2020 given the group’s network of contractors, suppliers, consultants and authorities built up over 16 years of working experience in Abu Dhabi and 18 years in the Middle East. The counterparty is a renowned business man related to the Abu Dhabi government and expected to secure sukuk funding for this project, the first of 4 phases to build a Silicon Valley in the UAE, by end-FY20 to 2Q2021. Serba is currently reviewing a proposal to subscribe 20%–30% in this project’s equity.

• Serba will set up a committee to invite Malaysian small-medium enterprises to competitively bid for the UAE sub-contracts. While Sarawak Concrete Industries and Kumpulan Powernet may bid for these jobs, Datuk Karim, who has substantive equity stakes in them, will not be involved in the selection process.

• While oil & gas remains a core business for the group’s operation and maintenance division, management is intentionally reducing Serba’s reliance on this sector with EPC, power and IT projects. Currently, only 45% of Serba’s outstanding order book of RM17bil, which is already ahead of its FY20F target of RM15bil, stems from O&G.

• With FY20F net gearing expected to reach 0.9x, the group’s cap of 1x may not be achievable with additional working capital needs of up to RM600mil from the UAE job. Despite its recurring income profile, the high gearing translates to a low FY20F PE of only 9x vs. its closest peer Dialog Group’s 28x.

Source: AmInvest Research - 22 Apr 2020