Investment Highlights

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

• The group has filed a civil suit against its auditor KPMG over damages of RM4.9bil (2.1x Serba’s market cap) stemming from the plunge in market capitalisation together with loss of confidence from customers, investors and financial institutions.

• The claim rests on Serba’s contention that KPMG, the group’s auditor for 7 years, was negligent in the audit process and that the issues raised were not substantive enough to call for an independent review. Also, Serba views that those issues could have been resolved through proper engagement with the group’s management under international and local protocols.

• 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.

• Pending further revelations from the auditor and independent reviewer, we remain cautious on the chances of a successful legal suit against a globally recognised accounting practice. At this juncture, Ernst & Young has not accepted the appointment to be the independent reviewer after Serba’s board of directors has agreed in principle.

• Until the independent 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.

• Additionally, Serba has recently confirmed entering into a strategic partnership on 2 March 2021 to own a 49% effective equity stake in US$1.8bil (RM7.4bil) contract in April 2020 to engineer, procure and construct an IT-focused innovation hub in Abu Dhabi, the United Arab Emirates (UAE). This was not announced at that time, which could prompt further speculations on other projects undertaken by the group.

• 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. Furthermore, 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, exacerbating additional capital requirements.

• 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 - 23 Jun 2021