Serba Dinamik (Serba) reported a commendable performance in its 1QFY20 results with earnings growing 19.2% YoY, in tandem with a 29.9% increase in revenue to RM1.3bn. YoY performance was attributed to stronger contribution from all segments which saw growths of 28.3% in O&M, 26.1% in EPCC, and 35.3% in other services at the gross profit level. Notable contributions were from the Middle East region particularly UAE, Qatar and Oman as well as Tanzania. Profit margins are relatively stable with gross and net levels maintained at 18% and 10% respectively. The numbers are in line our and consensus full-year estimates accounting for 23.4% and 21.4% respectively. We keep our FY20F-22F forecasts unchanged in anticipation of earnings remaining stable on the back of its strong outstanding orderbook of c. RM17bn despite of the challenging operating climate currently. Its business nature as a maintenance service provider allows Serba to continue operating at 80% capacity level. We reiterate our Outperform rating on Serba with an unchanged TP of RM2.49 based on an unchanged PE multiple of 12.8x over FY21 EPS of 19.5sen. A first interim single tier dividend of 1.2sen was declared, in line with our full year target of 5.1sen.

• Results highlight. Topline grew by 29.9% YoY to RM1.3bn attributed to strong contribution for all segments. Significant increases in O&M activities (29.2% YoY) were seen in the Middle East region such as UAE, Qatar and Oman due to higher activities from MRO while EPCC revenue increased by 26.5% YoY mainly derived from the chlor-alkali plant in Tanzania and some fabrication works for Petronas Carigali in Malaysia. With stable margins at all levels, the Group reported a higher net profit of RM133.7m (+19.2% YoY) for the quarter. Weaker QoQ performance was largely anticipated given the strong 4QFY19 net profit post-seasonally lower activities in 3Q in Middle East O&M jobs, as well as EPCC works in South East Asia, particularly Malaysia and Laos.

• RM17bn orderbook - greater earnings visibility. Serba had recently secured its single largest project amounting to RM7.7bn, bringing YTD wins to RM8.6bn. Assuming a burn rate of around 23% or RM3.9bn of its orderbook in the remaining 3 quarters, it is estimated that the Group will just need to replenish c.RM1.9bn to achieve its year-end goal of an RM15bn outstanding orderbook. While likely not difficult to achieve, we see the Group securing even more given its strong presence globally coupled with its good relationship with clients and commendable track record. Other projects may include the EPCC for petrochemical-based projects locally and overseas and new or extension of O&M contracts in Malaysia, Middle East, Africa and Mexico.

Source: PublicInvest Research - 21 May 2020