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 (SOP) valuation of RM3.15/share.

• Our FY20–FY22F earnings are maintained as Serba’s 1HFY20 net profit of RM282mil came in within both our and street’s expectations, accounting for 49% of our FY20F earnings and 50% of consensus. As a comparison, 1H accounted for 49%– 52% of FY17–FY19 net profits.

• The group declared a second interim dividend of 1.3 sen (+0.1 sen QoQ to bring 1HFY20 dividend to 2.5 sen, translating to a payout ratio of 30%. While this is in line with Serba’s minimum policy, we have reduced FY20F–FY22F dividends by 15%–35% as the group is likely to conserve cash during the ongoing Covid-19 pandemic and low oil price environment.

• YoY, Serba’s 1HFY20 net profit rose 16% in tandem with a 28% revenue increase to RM2.7bil. Even though operating margins were flattish, the lower net margin stems from interest charges doubling YoY due to working capital requirements, Covid-19 impacted losses from manufacturing associates and a 1- percentage point increase in effective tax rate.

• Serba’s 2QFY20 net profit climbed 11% QoQ in tandem with a 13% revenue rise to RM1.4bil, underpinned by both the operation and maintenance (O&M), and engineering, procurement and construction (EPCC) segments. Geographically, this growth was largely driven by operations in the Middle East region (+22% QoQ), followed by Malaysia (+3%) that caused the Middle Eastern share of revenue to expand to 67% in 2QFY20 from 62% in 1QFY20.

• Serba’s outstanding order book has surged by 9% QoQ to RM18.5bil currently with the recent award of another substantive construction project in Abu Dhabi, United Arab Emirates worth US$350mil (RM1.5bil) from Future Digital Data Systems LLC (FDDS) to design, procure and construct a data centre together with infrastructure and landscaping works. This already exceeds its FY20F year-end target of RM15bil.

• Notwithstanding Middle Eastern losses incurred by other Malaysian-based construction companies in the past, the group remains confident of executing these huge Abu Dhabi projects given that its managing director Datuk Mohd Abdul Karim, with his savvy business network, has successfully completed multiple oil & gas jobs in the region with commendable profit margins over the past 10 years.

• As such, the group’s good earnings visibility, together with its recurring income profile and improving balance sheet risks translate to an unjustified FY21F PE of only 9x vs. its closest peer Dialog Group’s over 30x.

Source: AmInvest Research - 26 Aug 2020