Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with unchanged forecasts and 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).
• Serba secured 6 operation & maintenance (O&M) contracts, one engineering, procurement, construction and commissioning (EPCC) contract and 2 information, communication and technology (ICT) jobs from Malaysia, Indonesia, the UAE and Guinea.
• The overseas jobs include building a 4.8MW biogas renewable energy power plant at Aceh Tamiang in Indonesia 1 Sep 2020–August 2021, providing maintenance services for microturbine generators in Indonesia 21 Sep 2020–20 Sep 2022, Indonesia-based virtual technology demo room rental services 9 Nov 2020–8 Dec 2021 and plant maintenance services in the UAE 30 Nov 2020–29 Nov 2023, and implementing telecommunications and ICT infrastructure in Guinea January 2021–Dec 2022.
• The combined contracts with specific values from overseas reach RM466mil (US$114mil) while the O&M jobs in Malaysia are on a call-out basis which will be awarded at the clients’ discretion. These domestic O&M jobs were awarded by PTTEP, Sarawak Shell, JX Nippon Oil & Gas Exploration and BASF Petronas Chemicals.
• Given Serba’s quarterly order book depletion of RM1.5bil, we expect its outstanding order book at RM18.5bil as at 3Q2020 to decline by 5% to RM18bil in 4Q2020 unless as the group manages to secure additional contracts by then.
• Nevertheless, we would not be surprised by additional contracts soon as Serba aims to lease parts of the facilities to third parties. Serba would also be angling for fresh jobs in decommissioning, petrochemicals and renewable sectors following the recent conclusion of the purchase of the RM320mil Teluk Ramunia yard from Petronas.
• As such, we are not unduly worried about the overall slowdown in the sector’s order awards as Serba’s outstanding book had already exceeded its FY20F year-end target of RM15bil (+50% YoY) since 1QFY20.
• 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 8x vs. its closest peer Dialog Group’s over 30x.

Source: AmInvest Research - 3 Dec 2020