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 neutral on Serba exiting its 25% associate CSE Global (CSE) as the group expects to utilize the cash disposal proceeds of S$58mil (RM177mil) for working capital which will generate higher earnings accretion.

• Recall that Serba had invested the same Singapore dollar amount over 2 years ago on 13 April 2018 but at a lower RM171mil due to the depreciation of the ringgit since then.

• Hence, the sale’s forex gain of RM6mil together with dividends paid out will partly offset the reversal of associate contributions recognised since the stake acquisition. As such, we understand that the one-off loss from the sale which Serba will recognise will be relatively marginal.

• The selling price of S$0.45/share translates to a prevailing PE of 10x based on CSE’s FY19 net profit of RM24mil. Assuming an interest saving rate of 5%, we estimate that the loss of the associate contribution will lead to a slight FY21F net profit decline of 1%. However, the cash proceeds will also slightly reduce the group’s FY20F net gearing from 63% to 57%. Hence, our forecasts are maintained.

• SGX-listed CSE Global Group provides integrated industrial automation, telecommunications and environmental solutions projects in the Americas, Asia Pacific, Europe, Middle East and Africa. CSE operates a network of 41 offices in 17 countries with over 90% of its revenue derived outside Singapore.

• Serba’s initial plan was to tap into CSE’s global network and leverage its oil & gas customer base. While collaborating in multiple projects overseas, management eventually viewed that CSE’s business objectives were not compatible with Serba despite a fair earnings yield of 10%.

• Management affirms that Serba’s other multiple investments and associates remain synergistic to the group and have no plans to divest any of them at this juncture.

• Meanwhile Serba’s substantive order book of RM17.5bil (3.4x FY20F revenue), of which 44% stem from the massive US$1.8bil (RM7.7bil) Innovation Hub property development project in Abu Dhabi, already exceeds management’s FY20F year-end target of RM15bil. This provides good earnings visibility that together with its recurring income profile and lower balance sheet risks translate to an unjustified FY21F PE of only 9x vs. its closest peer Dialog Group’s over 30x

Source: AmInvest Research - 8 Jul 2020