• We maintain SELL on Serba Dinamik Holdings (Serba) with our fair value of RM0.53/share, based on a 40% discount to CY20 net book value, being under review currently given the potential provisions arising from audit concerns raised by its former auditor amid heightened balance sheet risks. Our valuation also reflects our neutral 3-star ESG rating.

• As Serba has changed its financial year-end from Dec to June, we have adjusted our forecasts accordingly from 18MFY21F onwards. However, we have reduced FY22F-FY23F earnings by 16%-17% on lower revenue growth assumptions as 1QCY21 net profit of RM113mil came in below expectations. On an annualised basis, the group’s 1QCY21 net profit was lower than our earlier CY21F earnings by 35% and market consensus 42%.

• QoQ, Serba’s 1QCY21 net profit fell 44% as revenue seasonally decreased 24% to RM1.4bil, which management indicated as also partly caused by the Covid-19 movement restriction orders (MCO) in Malaysia, Indonesia and the Middle East. We note that 65% of the revenue reduction stemmed from Malaysia. Notwithstanding the lower revenue, we note that the group’s operating profit was commendably stable at 17%.

• As a comparison, 1Q revenue has seasonally decreased QoQ by a lower range of 6%-16% over the past 4 years. Geographically, 65% of 1QCY21 revenue came from the Middle-East while the proportion of Malaysian revenue slid to 30% from 38% in 4QCY20.

• YoY, Serba’s FY20 net profit decreased by 15% despite revenue rising by 8%. This stemmed largely from a 41% YoY increase in depreciation, 11% increase in interest cost and 2%-point increase in effective tax rate. Given this declining YoY trajectory, we are doubtful of management’s earlier CY21F guidance for revenue and earnings growth rate of 10%– 15% against the negative backdrop of accounting issues raised by KPMG, which recently resigned as Serba’s auditor.

• Together with the group’s high net gearing of 77% currently, the likelihood of securing full financial support for the huge US$1.7bil (RM7.4bil) contract awarded in April 2020 to engineer, procure and construct an IT-focused innovation hub in Abu Dhabi, United Arab Emirates (UAE) now appears uncertain after recent revelations that Serba has an effective 49% stake in the project owner, Block 7 Investments.

• Excluding this project and the US$350mil job to build a data centre also in UAE, we estimate that Serba’s outstanding order book would halve from RM18bil currently to RM9bil - only 1.4x FY22F revenue. In our view, Serba’s share price appears precarious pending the restoration of confidence in the group’s accounts and mitigation of balance sheet risks.

Source: AmInvest Research - 28 Jun 2021