Results Highlights

• Serba Dinamik’s 4Q2019 net profit added 24.8% Y.o.Y to RM140.9 mln, due to the stronger execution of its orderbook across both its operational & maintenance (O&M) and engineering, procurement, construction and commissioning (EPCC) segments, coupled with the lower effective tax rate. Revenue for the quarter rose 39.1% Y.o.Y to RM1.36 bln. For 2019, cumulative net profit climbed 26.9% Y.o.Y to RM496.6 mln. Revenue for the year improved 37.9% Y.o.Y to RM4.53 bln.

• The reported earnings came within our forecast, accounting to 102.6% of our full year net profit forecast of RM483.9 mln for 2019. The reported revenue, however, came above our expectations, accounting to 112.1% of our full year estimate of RM4.04 bln. The variance in topline is due to the higher execution of existing orderbook.

• Segmentally in 4Q2019, the O&M segment’s EBIT climbed 36.4% Y.o.Y to RM222.8 mln on higher contribution from the Middle East region, whilst the EPCC segment EBIT expanded 32.8% Y.o.Y to RM22.3 mln on contribution from the chlor-alkali plant in Tanzania and activity with Petronas Carigali Sdn Bhd in Malaysia. The others segment – the provision of IT related services to customise solutions involving software developments’ EBIT, surged 48.4x Y.o.Y to RM9.8 mln on increase work orders, especially from Qatar.

• Net gearing level in 4Q2019 also increased to 0.8x (from 0.7x in 3Q2019) to fund working capital as its business activities expanded. A fourth interim dividend of 1.4 sen per share, payable on 16th March 2020, was declared.

Prospects

Serba Dinamik has secured another batch of contracts early this year with a combined value of approximately RM940.0 mln. This bumps their orderbook to RM10.7 bln (RM7.1 bln from the O&M segment and RM3.6 bln from the EPCC segment) brings them closer to Serba Dinamik’s internal target of RM15.0 bln by end-2020. The latest wins will also see earnings growth to sustain over the next three years. Meanwhile, its tender book remains relatively healthy at approximately RM15.0 bln, mainly from overseas. Moving forward, Serba Dinamik will continue to eye its overseas expansion, focusing on the Middle East countries.

On the local scene, Serba Dinamik will focus on two major projects, namely the Bintulu Integrated Energy Services Hub (BIEH) that saw MRO facility completed, other buildings such as th warehouse and storge facilities and waste water treatment plant in progress and Pengerang Integrated Development that saw piling and structural works being completed and is on track for completion by end-2020.

While existing orders may keep the group busy over the foreseeable future, Serba Dinamik will focus on expansion within the Central Asia, particularly in countries such as Uzbekistan, Turkmenistan and Kazakhstan. We are sanguine on the move that will see Serba Dinamik less dependent for jobs from the Middle Eastern region.

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 within 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 RM2.63. We arrive at our target price by ascribing a PER of 15.0x to its’ forecast 2020 EPS of 17.6 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 hit the targeted orderbook of RM15.00 bln by end-2020. 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 - 27 Feb 2020