Investment Highlights

• We maintain our BUY call on Serba Dinamik Holdings (Serba) with a higher fair value of RM2.40/share (from an earlier RM2.20/share), based on a 20% discount to our diluted sumof-parts (SOP) valuation of RM2.99/share (Exhibit 4). This implies an FY21F PE of 14x vs Dialog’s 28x.

• We raise our FY21–FY22F earnings by 6%–7% on higher revenue assumptions with Serba’s FY20 net profit of RM632mil exceeding expectations, 9% above our forecast and 10% above consensus. The group also declared a final 4QFY20 dividend of 1.6 sen, which brings FY20 DPS to 5.4 sen, 7% above our forecast.

• YoY, Serba’s FY20 net profit grew 27% in tandem with a 33% revenue increase to RM6bil, partly offset by depreciation rising by 51% to RM1.1bil, net interest cost increase of 5%, reversal of associate losses and a 2 percentage-point rise in effective tax rate. This outstripped management’s FY20F guidance for revenue and earnings growth rate of 10%–15%.

• Amid the conditional movement control order (CMCO) caused by the Covid-19 pandemic, Serba’s 4QFY20 net profit soared 37% QoQ to RM202mil, driven by revenue increasing by 22.5%. This was further supported by net finance cost dropping by 38% from sukuk refinancing. Hence, 4QFY20 accounted for 32% of FY20 net profit, vs. 28% for 4QFY19.

• Geographically, 80% of the 4QFY20 revenue increase came from Malaysia, of which operation and maintenance jobs accounted for 77%. Hence, the proportion of Middle Eastern contribution to group revenue slid to 56% from 64% in 3QFY20.

• Including the RM1bil contracts secured over the past month, we believe Serba’s outstanding order book rose slightly by 1% QoQ at RM18.7bil. However, as previously highlighted, this locked-in future revenue has exceeded the group’s FY20F target of RM15bil (+50% YoY) which was set in early 2020.

• With management aiming for an FY21F order book growth of 15%, we expect the group’s revenue growth prospects to be supported by plans to lease parts of the 170-acre Teluk Ramunia yard to third parties while angling for fresh jobs in decommissioning, petrochemicals and renewable sectors.

• The group’s private placement of 337mil shares at RM1.51/share in January this year is expected to cut net gearing to 69% by from 95% as at 31 Dec 2020. This improved financial flexibility together with good earnings visibility from recurring O&M operations translate to an unjustified FY21F PE of only 9x vs. its closest peer Dialog Group’s 28x.

Source: AmInvest Research - 1 Mar 2021