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.

• We are positive that the group will be able to secure fresh engineering, procurement, construction, installation and commissioning (EPCIC) jobs to more than mitigate the increased costs arising from the proposed acquisition of 170 acres of industrial land with warehouses, workshops and fabrication yard in Teluk Ramunia, Kota Tinggi, Johor for RM320mil cash or RM43 psf from Petronas.

• Given that the independent valuer, PPC International, has assessed the property at a slightly higher RM335mil or RM45 psf, we view the price tag as reasonable. Recall that Petronas acquired this yard from Sime Darby Engineering back in 2011 for RM296mil cash.

• Petronas has since upgraded the yard, while Malaysia Marine & Heavy Engineering has utilised its fabrication facilities to support the first phase of the Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, Johor.

• The group is currently applying for additional work scope qualifications as a total engineering service provider involving decommissioning, offshore transport & installation, topside maintenance, hook-up & commissioning activities with green yard certification to cater to the requirements of Petronas and international clientele.

• Assuming an EPCIC gross margin of 15%, depreciation charge over 15 years and interest cost at 5%, we estimate that Serba would need a fresh order book of RM250mil annually to break even for this new asset. We understand that the group is eyeing fresh orders from the second phase of RAPID which could reach tender values of RM1bil, potentially escalating the group’s order book momentum.

• Serba’s order book has already grown by a much larger RM7bil within only 3 months to RM17bil currently, driven mostly from the massive US$1.8bil (RM7.7bil) Innovation Hub property development project in Abu Dhabi. This already exceeds its earlier FY20F year-end target of RM15bil, while the Middle Eastern and Malaysian regions accounted for 90% of FY19 revenue.

• With completion of the proposed acquisition by 3QFY20, we do not expect any substantive impact to FY20F earnings even if the new orders did not materialise by the end of this year. However, as stronger EPCIC order flow next year could easily offset the additional costs from the yard acquisition, we maintain Serba’s FY20F–FY22F earnings for now pending the announcement of fresh contracts.

• Meanwhile, this proposed acquisition will raise Serba’s FY20F net gearing from a comfortable 0.6x to a still comfortable 0.7x (including the 10% equity placement which was completed in May this year). Hence, Serba’s recurring income profile together with mitigated balance sheet risks translate to an unjustified FY21F PE of only 9x vs. its closest peer Dialog Group’s 30x.

Source: AmInvest Research - 15 Jun 2020