Investment Highlights

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

• Serba announced a proposal to undertake a private placement of up to 10% of its share capital, which could mean up to 395mil shares, excluding treasury shares. The book-building exercise is intended for third-party investors within 6 months of Bursa’s approval for the listing of the placement shares.

• Currently, Serba has 3,084mil shares (including 19mil treasury shares) and 881mil warrants. As the exercise price of the warrants, which expire in Dec 2024, is RM2.62, it is unlikely that the holders will exercise their out-of-money instruments currently.

• Hence, we expect that the maximum number of shares which Serba can issue would be 306mil shares. Based on the closing price yesterday, this translates to potential proceeds of RM496mil which could reduce Serba’s FY20F net gearing from a high 0.9x to a more manageable 0.6x. Assuming interest savings at 6% annually, we estimate that Serba’s basic EPS (excluding warrant exercise) could be diluted by 5%.

• The group intends to utilize the funds for working capital purposes given its ambitious order book expansion, which includes the recent US$1.8bil (RM7.7bil) contract to build innovation hub, academic campus, apartments, hotels and IT centre over 4 years in Abu Dhabi, the UAE.

• This development is not a surprise as we had consistently highlighted this possibility in our past updates due to Serba’s high gearing levels and aggressive expansion plans. Also, Serba’s AGM had already approved an issuance of up to 10% of its share capital.

• A Bloomberg newsflash had earlier indicated that Serba was aiming for a halved share placement of 153mil shares priced at RM1.49–RM1.52/share.

• We note that Serba’s share price has dropped to an intra-day low of RM1.02/share on 19 March 2020 when Brent oil price was trading at US$26/barrel. As Brent oil prices could fall even further next month with WTI futures again likely to slip into negative prices, we believe that Serba’s share price could again test the trough levels.

• As such, amid a precipitous decline in oil prices and demand due to a Covid-19 depressed global economy, we are uncertain of the success of this proposed exercise at this juncture. Despite its recurring income profile, Serba’s high gearing translates to a low FY20F PE of only 9x vs. its closest peer Dialog Group’s 28x.

Source: AmInvest Research - 24 Apr 2020