WHAT’S NEW

Serba announced that it has secured an engineering, procurement, construction and commissioning (EPCC) contract for 30MW hydropower facilities in Laos. The contract, which is secured from Nam Taep 1, 2, 3 Hydropower Company Limited, is estimated at US$66m (RM0.26b) and covers the Nam Taep 1 and Nam Taep 2 hydropower energy facilities.

Serba also will acquire 15% stake in Green & Smart Holding PLC, for a cash consideration of GBP3m (RM17m) pursuant to the acquiree’s private placement exercise. 80% of the consideration will be financed by borrowings.

COMMENT

• Positive contract win momentum. We believe that the third Nam Taep 3 hydropower facility (~10MW) has not yet been signed for in the current contract, which suggests that the EPCC value could be expanded in future. Also, an operation and maintenance (O&M) contract (roughly >RM50m, assuming 1% of the EPCC value for 21 years) should follow. While Serba will likely work with other partners for the project, the offtaker of the power capacity is the Laos government. We expect Serba to eventually invest in a 20-30% stake on that project as part of its asset ownership strategy. The sizeable Laos EPCC project is within management guidance and market expectations, but is positive as it boosts the outstanding orderbook from RM6.6b to RM6.9b (O&M: RM4.6b, EPCC: 2.3b).
• Diversifying its profile as a renewable energy player. While Serba already has sizeable EPCC and JV exposure in hydropower and utility projects, the JV investment in Green & Smart marks its serious entry into the biogas (palm oil) segment. We understand that Green & Smart is operating two biogas power plants in Malaysia, one of which (3MW) has an EPCC contract currently being executed by Serba. For a small investment, Serba has access to future opportunities of more biogas power plants that may be awarded to Green & Smart in Malaysia (where it has the license to operate more plants) and in the neighbouring region of Indonesia.
• We maintain our net profit forecasts of RM398m and RM514m for 2018-19 respectively as the contract wins, earnings and the eventual uptrend in net gearing are within expectations. Given that Laos is a new country and clientele for Serba, we conservatively assume that the revenue recognition may only commence from mid-19 (management’s guidance is early-19).
• Maintain BUY and target price of RM4.30, pegged to 12x 2019F PE, at a premium to smaller local peer Deleum given Serba’s superior diversification, earnings growth (20-36% CAGR) and ROE (23%). Our forecast is 3-11% above consensus estimate, which already conservatively assumes significant JV losses and low US$/RM of 3.80.

Source: UOB Kay Hian Research - 20 Jul 2018