Results Highlights

• Serba Dinamik’s 1Q2019 net profit climbed 19.2% Y.o.Y to RM133.7 mln, underpinned by higher contribution across all four major business segments. Revenue for the quarter gained 29.9% Y.o.Y to RM1.28 bln.

• The reported earnings came within our forecast, accounting to 25.4% of our full year net profit forecast of RM526.1 mln for 2020. The reported revenue also came within expectations, amounting to 24.6% of our full year estimate of RM5.19 bln.

• Segmentally in 1Q2019, the O&M segment’s EBIT grew 28.3% Y.o.Y to RM202.5 mln on higher contribution from topline growth, whilst the EPCC segment EBIT rose 26.1% Y.o.Y to RM21.7 mln on contribution from the chlor-alkali plant in Tanzania and Europe. The ICT and E&T segment EBIT rose 32.0% and 172.7% to RM4.3 mln and RM210,000 respectively as a result of the group’s continuous efforts to diversify business mix.

• Net gearing level in 1Q2020 also increased to 1.0x (from 0.8x in 4Q2019) to fund working capital as its business activities expanded, but will be pared down by part of the utilisation of proceeds from the recent completion of private placement exercise. An interim dividend of 1.2 sen per share, payable on 26th June 2020 was declared.

Prospects

Apart from the first batch of contracts secured earlier this year with comprised value of approximately RM940.0 mln, Serba Dinamik has secured another major turnkey project for the construction of an innovation hub, academic campus, related facilities and IT infrastructure at Abu Dhabi valued at approximately RM7.71 bln, marking the largest single contract for the construction of facilities for Serba Dinamik.

For now, Serba Dinamik will continue to eye its overseas expansion, focusing on the Middle East countries as demonstrated on the latest contract win. At the same time, the waste water treatment plant in progress and Pengerang Integrated Development remains on track for completion by end-2020, whilst the Bintulu Integrated Energy hub will provide long term recurring income for the group.

In view of the recent slump in crude oil prices, oil & gas players have begun to slash their CAPEX and OPEX which will indirectly hit Serba Dinamik’s future orderbook replenishment. Nevertheless, the group’s current outstanding orderbook of approximately RM17.0 bln will anchor earnings growth over the next three years. Moving forward, Serba Dinimik aims to reduce their reliance on the oil & gas business segment, targeting revenue contribution from the aforementioned sector to 30% (from approximately 97.8% at present).

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.

With the reported earnings coming within our expectations, we made no changes to our earnings forecast and we maintain our BUY recommendation on Serba Dinamik with an unchanged target price of RM2.02. We arrive at our target price by ascribing a PER of 15.0x to its forecast 2020 EPS of 15.5 sen. The ascribed target PER is similar to midlarge cap oil & gas peers’ average of 16.0x.

Risks to our recommendation include failure to hit the targeted orderbook of RM14.00 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 - 21 May 2020