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 maintain our forecasts following our meeting with management last week. These are the highlights of our meeting:
• Management maintains its outstanding order book target of RM15bil by the end of this year, even though Serba’s current order book is higher at RM17.5bil (3.4x FY20F revenue). Recall that 44% of its order book stem from the massive US$1.8bil (RM7.7bil) Innovation Hub property development project in Abu Dhabi, in which the financing for the working capital will be finalized towards the end of the year.
• The group acknowledges that tender activities have substantially decelerated with awards being delayed due to the Covid-19 impact. Jobs being awarded currently are from tenders announced from the previous year. Nevertheless, management maintains its FY20F revenue and earnings growth guidance of 10%–15% given its strong locked-in order book.
• Notwithstanding Middle-Eastern losses incurred by other Malaysian-based construction companies in the past, the group remains confident of executing the Abu Dhabi project given that its managing director Datuk Mohd Abdul Karim, with his savvy business network, has over 10 years of completing multiple oil & gas jobs in the region with commendable profit margins.
• Serba expects the handover of 170 acres of industrial land with warehouses, workshops and fabrication yard in Teluk Ramunia, Kota Tinggi, Johor, which is being acquired for RM320mil cash or RM43 psf from Petronas, in September this year. The group already expects to support the yard with RM100mil–RM200mil jobs from its existing order book, which is currently being undertaken in other leased facilities.
• With an annual breakeven order book of only RM30mil–RM40mil, Serba expects the Ramunia yard to be profitable next year, especially as the group hopes to secure a major fabricator licence from Petronas by 4QFY20 while potentially leasing parts of the yard to strategic partners. Serba is currently eyeing decommissioning jobs, transportation and installation work which require rigging and loading up points in the area together with subcontracting activities from nearby MMHE.
• The group’s 30%-owned 29MW hydro power project in Kota Marudu, Sabah is expected to be completed by the end of this year. As this RM218mil EPCC project was delayed by a year due to Sabah Electricity’s yet-to-be-ready power grid, there is no additional cost or provision expected from this project.
• Likewise, the group will also not incur any additional costs from the group’s 40%-owned Kuala Terengganu Utara water treatment plant, which will only be completed by mid-2021 vs. the original schedule in 2Q2020 due to Covid19 movement restrictions. The group’s stake had earlier secured EPCC works worth RM290mil under Konsortium Amanie, which is building a 120mil litre/day membrane water treatment plant, intakes, service tank, installation of raw water and clean water pipes and retrofitting works for the Kuala Terengganu Utara Water Supply Scheme.
• Meanwhile, the group’s proposed investment in 40% equity stakes in Maju Renewable Energy, Maju RE (Talang) and Maju RE (Temenggor) for RM25mil has lapsed without any financial impact on Serba. The power plants, with a combined 60MW capacity, are under an EPCC contract worth RM560mil. The facilities were supposed to be developed within the Temenggor and Belum Forest Reserves in Perak, of which a 27MW hydropower plant will be located in Singgor, a 19MW hydropower plant in Talang, and a 14MW hydropower plant in Temenggor. However, Maju’s power purchase agreements with Tenaga Nasional were not extended.
• The group’s foreign shareholding has risen to 8% from 5% following Serba’s equity placement of 10% in April this year. The group’s good earnings visibility, 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 - 4 Aug 2020