Results Highlights

• Serba Dinamik’s 2Q2019 net profit rose 27.0% Y.o.Y to RM130.4 mln, underpinned by improved contribution from the higher orderbook across both its operational & maintenance (O&M) and engineering, procurement, construction and commissioning (EPCC) segments. Revenue for the quarter gained 41.6% Y.o.Y to RM1.14 bln. For 1H2019, cumulative net profit added 24.2% Y.o.Y to RM242.6 mln. Revenue for the period climbed 38.3% Y.o.Y to RM2.12 bln.

• The reported earnings came slightly above our expectations, accounting to 55.5% of our previous full year net profit forecast of RM437.4 mln for 2019. Similarly, the reported revenue accounted to 54.2% of our full year estimate of RM3.91 bln.

• Segmentally in 2Q2019, the O&M segment’s EBIT climbed 35.6% Y.o.Y to RM326.5 mln on higher contribution from the Middle East region, Malaysia and Indonesia, whilst the EPCC segment EBIT expanded 40.5% Y.o.Y to RM39.3 mln on improved topline growth. The Others segment – the provision of IT related services to customise solutions involving software developments’ EBIT, surged 105.1% Y.o.Y to RM6.8 mln on increase work orders.

• Geographically, Malaysia remained as the key contributor, accounting to RM338.5 mln or 29.7% of the total revenue of RM1.14 bln in 2Q2019. We note that the net gearing level in 2Q2019 also increased to 0.6x (from 0.5x in 1Q2019) to fund working capital as its business activities expanded. A second interim dividend of 2.7 sen per share, payable on 30th September 2019, was declared.

Prospects

Serba Dinamik remains consistent in displaying its continuous contacts wins, on track to meet our orderbook replenishment target of RM4.00 bln for 2019. Together with the third batch of contract wins, Serba Dinamik’s orderbook replenishment stands at RM2.60 bln YTD, comprising of RM1.40 bln for the O&M segment and the remaining RM1.20 bln for the EPCC segment.

This bumps its outstanding orderbook to a record high of approximately RM9.00 bln, comprising of approximately RM6.00 bln for the operational & maintenance segment and approximately RM3.00 bln for the engineering procurement, construction and commissioning segment that will sustain its earnings visibility for the next three years.  In the meantime, its tender book remains relatively healthy at approximately RM15.0 bln. Moving forward, Serba Dinamik will continue to eye its overseas expansion, focusing on the Middle East countries.

In the meantime, we expect the EPCC segment to see higher contribution as the Laos project commenced construction. The project revolves around the development, financing, design, engineering, procurement, supply, manufacturing, construction, installation, erection, testing and commissioning of the Nam Taep 1 and Nam Taep 2 hydropower energy generating facilities, slated for full completion in early 2022.

Valuation and Recommendation

We continue to like Serba Dinamik as it is one of the largest oil & gas service equipment providers in Malaysia, backed by its sturdy orderbook comprising of dozens of jobs from local and overseas that will provide long-term earnings visibility.

As the reported earnings came above our expectations, we raised our earnings forecast by 10.6% and 19.5% to RM483.9 mln and RM540.5 mln for 2019 and 2020 respectively, reflecting the faster execution and improved overseas margins from its rising orderbook, coupled with the lower effective tax rate at 10.0% (pervious assumption 11.0%).

Consequently, we maintained our BUY recommendation on Serba Dinamik with a higher target price of RM5.52 (from RM4.65). We arrive at our target price by ascribing a PER of 15.0x to its revised forecast 2020 EPS of 36.8 sen. The ascribed target PER is similar to mid-large cap oil & gas peers’ average of 16.0x.

Risks to our recommendation include failure to secure the targeted orderbook replenishment of RM4.00 bln for 2019 and 2020 respectively. A firmer Ringgit against the U.S. Dollar could affect the group’s bottom line as a recovery in the local currency against the Greenback will have a negative impact on the group’s earnings and vice versa.

Source: Mplus Research - 23 Aug 2019