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 (Exhibit 3).
• Our FY20–FY22F earnings are maintained as Serba’s 9MFY20 net profit of RM430mil came in within our and street’s expectations, accounting for 74% of our FY20F earnings and consensus. As a comparison, 9M accounted for 71%–74% of FY17–FY19 net profits.
• The group declared a third interim dividend of 1.35 sen (+4% QoQ) to bring 9MFY20 dividends to 3.85 sen, translating to a payout ratio of 30%. This is in line with Serba’s minimum policy and our forecasts. Even with the higher dividends being declared, 9MFY20 DPS has fallen by 37% due to the 2-for-5 bonus and 1-to-2 share split exercise in Dec last year.
• YoY, Serba’s 9MFY20 net profit rose 21% in tandem with a 33% revenue increase to RM2.7bil. We note that this is higher than management’s FY20F guidance for revenue and earnings growth rate of 10%–15% this year. Even though 9MFY20 operating margins rose 1 percentage point (ppt), the pretax margin slid by a similar percentage from a 52% increase in depreciation charges and doubling of interest charges due to working capital requirements and Covid-19-impacted losses from manufacturing associates.
• Serba’s 3QFY20 net profit was flat QoQ as a 1-ppt decline in EBITDA margin was offset by a similar decrease in effective tax rate. However, the group’s 3QFY20 revenue still rose 3% QoQ to RM1.5bil, underpinned by the operation and maintenance (O&M) and ICT divisions. This was partly offset by a 34% QoQ drop in engineering, procurement and construction segments, partly from Covid-19 restrictions.
• Geographically, this growth was largely driven by operations in Malaysia (+3%) and ex-Middle Eastern regions that caused the Middle Eastern share of revenue to decrease to 64% in 3QFY20 from 67% in 2QFY20. Serba’s outstanding order book was flat QoQ at RM18.5bil as the group had secured sufficient fresh jobs to offset the quarterly billings. Even so, this had already exceeded its FY20F year-end target of RM15bil since 1QFY20. With the recent handover of the RM320mil Teluk Ramunia yard, Serba aims to lease parts of the facilities to third parties while securing fresh jobs in decommissioning, petrochemicals and renewable sectors.
• The group’s net gearing has risen from 76% in 2QFY20 to 89% in 3QFY20 from working capital needs with management aiming to cap it at below 1x. As such, the group’s good earnings visibility together with its recurring income profile translate to an unjustified FY21F PE of only 9x vs. its closest peer Dialog Group’s over 30x.

Source: AmInvest Research - 24 Nov 2020