Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with an unchanged fair value of RM2.20/share, based on a 30% discount to our diluted sum-of-parts valuation of RM3.15/share.

• The UK’s Daily Business reported that Serba has acquired an 80% equity stake in Wellahead Engineering, an Aberdeenbased precision engineering service provider for the North Sea oil & gas industry, for £1.5mil (RM8mil) cash. The founder Mike Coutts retains the remaining 20% equity stake and will continue to manage Wellahead.

• While this is a relatively small acquisition compared with Serba's market cap of RM6bil, the group plans to leverage Wellahead as a cornerstone to build its operations and penetrate the North Sea market which has yet to significantly contribute to group revenue.

• The deal will also provide Wellahead’s high quality capabilities with new opportunities for growth and access to Serba’s existing client base not just in Malaysia but also in the group's rapidly expanding operations in the Middle East which has experienced an explosive FY14–FY19 compounded average growth rate of 63% over the past 5 years.

• Commencing operations in 1998, Wellahead, which employs 15 staff, generated an FY19 revenue of £2.5mil with EBITDA margin of 16% and net profit margin of 12%. This translates to a value-enhancing acquisition PE of 6x.

• As Wellahead's outstanding order book of £5–6mil (2–2.4x FY19 revenue) provides mid-range earnings visibility with no debt currently, we are positive on this development even though earnings accretion will not be substantive due to the marginal scale of the transaction.

• The group remains on the prowl for further value-enhancing acquisitions to expand its oil & gas maintenance-focused expertise and technical capabilities into existing markets while aggressively venturing into new geographical locations.

• Nevertheless, Serba growth trajectory will still be largely driven by the Middle East and Malaysia, which account for 90% of FY19 revenue. Recall that the group’s 1QFY20 outstanding order book has surged by 59% QoQ to RM17bil currently from the massive US$1.8bil (RM7.7bil) Innovation Hub property development project in Abu Dhabi, already exceeding its FY20F year-end target of RM15bil.

• Serba’s FY20F net gearing has improved from a high 0.9x to a more comfortable 0.6x with the 10% equity placement in May this year. Hence, Serba’s recurring income profile together with lower balance sheet risks translate to an unjustified FY21F PE of only 10x vs. its closest peer Dialog Group’s 30x.

Source: AmInvest Research - 11 Jun 2020