Summary

• Serba Dinamik Holdings Bhd’s 3QFY20 net profit gained 30.8% YoY to RM148.0m, underpinned by higher contribution across all, but the engineering, procurement, construction and commissioning (EPCC) segment. Revenue for the quarter added 41.8% YoY to RM1.48bn. For 9MFY20, cumulative net profit climbed 20.8% YoY to RM429.6m. Revenue for the period improved 32.5% YoY to RM4.20bn.

• The reported earnings came within our forecast, accounting to 73.2% of our full year net profit forecast of RM586.9m and 74.2% of consensus forecast of RM578.8m. The reported revenue came slightly above expectations, amounting to 77.6% of our full year estimate of RM5.41bn and 79.0% of consensus revenue of RM5.32bn.

• Net gearing level in 3QFY20 rose to 0.9x (from 0.8x in 2QFY20) as the group continues to hinge on external borrowings to cater for business expansion. A third interim dividend of 1.35 sen per share, payable on 30th December 2020 was declared.

• Moving forward, Serba Dinamik will continue to eye its overseas expansion, focusing in the Middle East region which is traditionally their strong foothold. Long-term recurring income remains to be seen from projects such as the Teluk Ramunia Yard, Pengerang Integrated Development and Bintulu Integrated Energy hub; the latter was recently completed.

• In bid to reduce the reliance on the oil & gas segment, Serba Dinamik’s ICT segment orderbook has increased to approximately RM1.85bn (close to 10.0% of total orderbook). We reckon that the diversification move is vital to ensure earnings sustainability, premised to the slash in CAPEX by oil & gas players which may see slower tenders over the foreseeable future.

• Still, the oil & gas business segment will anchor the topline growth, contributing >70.0% of total revenue in subsequent quarters. Moving forward, the group’s outstanding orderbook of approximately RM18.50bn will anchor earnings growth over the next two years.

Valuation & Recommendation

• We made no changes to our earnings forecast and we maintain our BUY recommendation on Serba Dinamik with an unchanged target price RM2.41. Our target price is derived by ascribing a target PER of 13.0x to its FY21f EPS of 18.5 sen.

• We continue to like Serba Dinamik as one of the key players in the oil & gas industry, backed by its sturdy orderbook comprising of dozens of jobs from local and overseas that will provide long-term earnings visibility, coupled with the group’s ongoing diversification effort into businesses that generates recurring income.

• Risks to our recommendation include failure to hit the targeted outstanding orderbook of RM16.50bn by end-FY20, while a firmer ringgit against the USD could affect the group’s bottom line as it will have a negative impact on the group’s earnings and vice versa with majority of existing orderbook derived from overseas.

Source: Mplus Research - 24 Nov 2020