Investment Highlights

• We maintain SELL on Serba Dinamik Holdings (Serba) with unchanged forecasts and fair value of RM1.26/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 holding company discount of 50% 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.

• Following the fresh announcement on 28 May and subsequent analyst briefing on 29 May, we highlight the following regarding the issues raised by Serba’s external auditor KPMG which led to a decision to appoint a special independent review:

• Inability to verify sales transactions of RM2.3bil and trade receivables of RM652mil for 11 customers for the period under audit. Serba has secured cash proceeds of up to 72% as at 31 March 2021 and up to 90% to date from those sales. However, as onsite materials of RM569mil (81% of FY21F net profit) have yet to be confirmed by the auditor, we believe that there may yet be risks for provisions or impairments.

• Local suppliers with minimal share capital of RM100K and yet having transaction values of RM60mil–RM96mil stems from being under Petronas’ vendor development programme (VDP), while the same incorporation dates/registered address appear to be the same secretarial services as these players are being advised by Serba as a VDP anchor.

• Inability to contact Bahrain customer and supplier may be due to the sighting of wrong address and misunderstanding of a telecommunication platform.

• Different IT suppliers’ names, registration numbers, addresses and activities in contracts and invoices in contrast to other documents and websites appear to be misreadings by the auditor. Also, the supplier’s direct payments to subcontractors are part of tripartite agreements for Serba to facilitate foreign currency transactions.

• Request to convene an EGM to replace KPMG, the auditor since 2013, with BDO PLT by Datuk Abdul Kadier Sahib, who holds an equity stake of 16% in Serba and a non-independent non-executive director and shareholder, seems to be triggered by concerns of the audit deadline as KPMG has yet to revert to management’s response on 3 May to the issues raised to the board of directors in April. This has prompted resistance by the Minority Shareholders Watch Group, which advocated shareholders to reject the motion.

Source: AmInvest Research - 31 May 2021