Investment Highlights

• We downgrade Serba Dinamik Holdings (Serba) to SELL from BUY with a lowered fair value of RM1.26/share (from an earlier RM2.40/share), premised on an FY21F PBV of 1.2x, which was the trough reached in March last year during the Russia-Saudi Arabian oil price war.

• This translates to a wider holding company discount of 50% (from 20% earlier) to our diluted sum-of-parts (SOP) valuation of RM2.53/share (Exhibit 1), which also reflects a neutral ESG rating of 3 stars. This implies an FY21F PE of 7x – 1.5 standard deviation below its 4-year average of 13x.

• While Serba’s FY21F–FY23F earnings are unchanged for now, our lower fair valuation stems from perceptions of elevated risks stemming from the appointment of an independent auditor by the group's board of directors to conduct a special review to “assess the veracity and accuracy of matters” raised by KPMG, its external auditors over the past 7 years since 2013.

• From an analyst briefing yesterday, we understand that this special review was partly triggered by difficulties involved in the audit process for the group’s regional operations in over 20 countries under Covid 19-enforced movement restrictions, which led to the group’s change in financial year-end from 31 December 2020 to an 18-month period ending 30 June 2021. In FY20, overseas projects account for 75% of Serba’s order book of RM18.7bil and 69% of its FY20 revenue.

• From the understanding of management at this juncture, the review does not appear to involve any elements of fraud, bribery or breach of trust. However, management did not reveal the exact nature nor sums involved in these operational issues raised by its own auditor except to say that updates will be made upon finalisation of the special audit appointment.

• While there could be more clarity when the review is completed together with the issuance on the group’s annual report by 31 October this year, we expect negative market speculations to percolate and impact the share price throughout the process which could last up to 5 months.

• The group’s private placement of 337mil shares at RM1.51/share in January this year is expected to cut net gearing to 69% from 95% as at 31 Dec 2020. Even so, this could still be high as management plans to invest into new ICT, data centres and telecommunication sectors. In our view, Serba’s valuations appears precarious pending the outcome of the special audit with a current PBV of 1.5x vs. its 4-year low of 1.2x.

Source: AmInvest Research - 27 May 2021