Investment Highlights

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

• The book-building exercise for Serba’s private placement of 306.5mil new shares or 10% of the group’s share capital, excluding treasury shares, has been completed by Affin Hwang IB, CIMB Investment Bank and Credit Suisse’s Malaysian and Singaporean branches.

• The price was fixed at RM1.49/share, an 8% discount to the closing price yesterday. The shares were subscribed by local and foreign institutional investors with the order book being oversubscribed by 1.5x.

• As we have highlighted yesterday, the gross proceeds of RM457mil is intended for working capital purposes given Serba’s 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.

• Our forecasts have been adjusted for the interest savings from the additional funds. We have slightly raised our FY20F–FY22F net profit by 1%–2%, while the enlarged share base has diluted FY20F–FY22F EPS by 8%–9%.

• Recall that 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.

• As mentioned in our update earlier today, Serba’s FY20F net gearing has improved from a high 0.9x to a more comfortable 0.6x. However, this could again rise towards 0.9x by FY21F with the additional working capital requirement of up to RM6mil with the construction commencement of the huge Abu Dhabi project.

• We note that Serba’s share price has dropped to an intraday 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. Hence, despite its recurring income profile, Serba’s balance sheet concerns translates to a low FY20F PE of only 9x vs. its closest peer Dialog Group’s 28x.

Source: AmInvest Research - 24 Apr 2020