Serba Dinamik reported weaker net profit of RM14.9m in its 6QFY21 results, dropping 89.9% as compared to the same period last year. Gross and net profit margin declined by 6.6ppt and 9.0ppt to 11.3% and 1.2% respectively. Management clarified that the poor performance was attributed to lockdowns and stricter standard operating procedures (SOPs) implemented globally given the still high of COVID-19 infections. Slower activities were seen in Middle East countries i.e., Bahrain (-83.5%), UAE (-52.1%), and Saudi Arabia (-58.6%) as well as in Indonesia (-47.6%) and Tanzania (-71.3%). Results are below our and consensus expectations given the negative surprise on margins. We cut FY22-23F by an average of 58.9%, considering slower execution and billings progress as well as lower operating margins given the challenging operating environment and normalized profit margins going forward. Negative sentiment on the stock continues to cloud, with much attention still paid to the independent auditor’s review and submission of the Group’s 18-month audited accounts. We maintain our Neutral call with TP adjusted lower to RM0.31 (from RM0.44 previously) based on 0.3x PBV of RM1.05. We continue to suggest investors stay sidelined given the uncertainties ahead.

• Results highlight. The Group’s 6QFY21 net profit dropped 86.8% QoQ to RM14.9m attributed to i) lower revenue by 12.7% QoQ due to weaker contributions by the maintenance (O&M) and information technology (ICT) segments by 12.6% and 61.6% QoQ respectively, and ii) weaker O&M and construction (EPCC) gross and net profit margins by 5.8ppt and 5.2ppt QoQ due to lockdowns and SOPs implemented globally. Activities dropped significantly in Bahrain (-90.1%), Saudi Arabia (-67.1%), Kuwait (-46.7%) and Tanzania (-42.1%).

• Healthy orderbook, but... While outstanding orderbook appears healthy at RM18bn, project execution remains a question given the still high COVID-19 infections. Additionally, we are of the view that the on-going audit issues may also affect its project execution owing to increased doubts by some clients until the issues are resolved. This also could be the reason for the drastic drop in revenue from certain Middle East countries such as Bahrain and the UAE. The audit issues are also expected to affect its orderbook replenishment, seeing the replenishment of only RM1.4bn from January to date, as compared to RM3.2bn (excluding the RM7.7bn contract) from January to June 2020 period.

• View and valuation. The on-going statutory audit issues may continue to be a drag on sentiment, with much attention paid to the independent auditor’s review which is expected to be concluded by end-October 2021, and the subsequent submission of the 18-month audited accounts. Recent share price weakness may continue given the negative surprise on its earnings, as well as on the uncertainties ahead. As such, we adjust our valuation for the stock based on a discount of 70% to its June 2021 book value of RM1.05 (from 50% discount to 12-month book value of RM0.88).

Source: PublicInvest Research - 30 Sept 2021