Results Highlights

• Serba Dinamik’s 3Q2019 net profit gained 36.0% Y.o.Y to RM113.2 mln, lifted by improved contribution from the stronger execution of its orderbook across both its operational & maintenance (O&M) and engineering, procurement, construction and commissioning (EPCC) segments. Revenue for the quarter climbed 35.7% Y.o.Y to RM1.05 bln. For 9M2019, cumulative net profit rose 27.7% Y.o.Y to RM355.8 mln. Revenue for the period grew 37.4% Y.o.Y to RM3.17 bln.

• The reported earnings came slightly below our forecast, accounting to 73.5% of our full year net profit forecast of RM483.9 mln for 2019. The reported revenue, however, came slightly above our expectations, accounting to 78.4% of our full year estimate of RM4.04 bln. The variance in bottomline is due to the higher reported effective tax rate of 11.8% vis-a-vis our forecast of 10.0%.

• Segmentally in 3Q2019, the O&M segment’s EBIT climbed 34.4% Y.o.Y to RM161.6 mln on higher contribution from the Middle East, whilst the EPCC segment EBIT expanded 45.4% Y.o.Y to RM16.2 mln on contribution from the chlor-alkali plant in Tanzania and activity with New Thunder in UAE. The others segment – the provision of IT related services to customise solutions involving software developments’ EBIT, surged 218.6% Y.o.Y to RM2.2 mln on increase work orders.

• Geographically, Qatar overtook Malaysia as the key contributor, accounting to RM295.5 mln or 28.3% of the total revenue of RM1.05 bln in 3Q2019. We note that the net gearing level in 3Q2019 also increased to 0.7x (from 0.6x in 2Q2019) to fund working capital as its business activities expanded. A third interim dividend of 1.11 sen per share, payable on 30th December 2019, was declared

Prospects

Serba Dinamik has secured another batch of contracts, comprising of two overseas contracts valued at RM683.0 mln and another three local contracts based on a “callout” basis. Together with the third batch of contract wins, Serba Dinamik’s orderbook replenishment stands at RM3.28 bln YTD – largely on track to meet our orderbook replenishment target of RM3.50 bln for 2019.

The latest win bumps its outstanding orderbook to a record high of approximately RM10.0 bln 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.

On the O&M segment, the Bintulu Integrated Energy Service Hub (BIEH) is on track to provide support to the O&G, petrochemical, and power generation industries in surrounding area following the completion of the MRO facility. 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.

Although the reported earnings came slightly below our expectations, we made no changes to our earnings forecast amid the seasonally stronger earnings in the final quarter of the financial year as traditionally displayed over the years. Therefore, we maintain our BUY recommendation on Serba Dinamik with an unchanged target price of RM5.52. We arrive at our target price by ascribing a PER of 15.0x to its’ 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 RM3.50 bln for 2020 and 2021 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 - 26 Nov 2019