Investment Highlights

• We maintain SELL on Serba Dinamik Holdings (Serba) with a lower fair value of RM0.53/share (from RM0.65/share previously) pegged to a 40% discount to CY20 NBV of RM0.88/share, given the potential provisions arising from audit concerns raised by KPMG amid deteriorating balance sheet risks. This also reflects our neutral 3-star ESG rating.

• Denying any related party interest in Serba’s securing of a US$1.8bil (RM7.4bil) contract in April 2020 to engineer, procure and construct an IT-focused innovation hub in Abu Dhabi, United Arab Emirates (UAE), the group nevertheless has confirmed entering into a strategic partnership on 2 March 2021 to own a 49% effective equity stake in the project owner, Block 7 Investments LLC.

• The job involves engineering, procuring and constructing exhibition/IT centres, offices, restaurants, academic campus and accommodation comprising apartments and hotels over a total built-up area of 455,000 sq metres.

• Expanding upon the group’s a strategic asset ownership model, Block 7’s ownership was transferred on 2 March 2021 to EFIRE Capital Holdings Limited (EFIRE), in which LIWA Investment Holding has an effective equity stake of 51% and Serba 49%. Upon completion of the transfer, EFIRE and LIWA owned equity stakes of 99% and 1% respectively in Block 7.

• Additionally, Block 7 signed a long-term land lease agreement on 31 March 2021 with government-owned ZonesCorp/Abu Dhabi Port, one of the UAE’s the largest operators of purpose built economic zones to develop the innovation hub project.

• Besides the potential construction earnings, Serba’s equity stake aims to position the group in securing facilities management services for recurring maintenance and upkeep of the project upon completion. While this four-year project was set to commence on 14 May 2020, it remains at conceptual master planning design phase and awaiting approval from Abu Dhabi’s authorities.

• Although 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, the group will again require fresh equity from the huge Block 7 investment.

• Assuming a 50:50 project equity-to-debt ratio, we estimate that Serba would need to raise RM1.8bil cash, 81% of its current market cap. As such, we are negative on this fresh revelation as banks may be wary of extending further credit and debt facilities following issues raised by its auditor.

• Additionally, Serba also secured a US$350mil (RM1.5bil) contract in August 2020 from Future Digital Data Systems LLC to engineer, procure and construct a data centre and its related facilities, infrastructure and landscaping also in Abu Dhabi. At this stage, we are uncertain if Serba also intends to become a strategic partner in this project and exacerbate additional capital requirements.

• Recall that KMPG has highlighted to Serba’s board of directors of an inability to verify sales transactions of RM2.3bil and trade receivables of RM652mil for 11 customers for the period under audit. Management said that 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 be risks for provisions or impairments.

• Until the review is completed together with the audit finalisation and issuance of the group’s annual report by 31 October this year, we expect negative market speculations to continue percolating and impact the share price throughout the process which could last up to 4 more months.

• In our view, Serba’s PBV of 0.7x appears precarious pending the outcome of the special audit together with higher capital requirements from its overseas investments.

Source: AmInvest Research - 22 Jun 2021