Serba still offers further upside, as it is expected to meet its RM7.5b orderbook target. Aside from international EPCC projects and the incoming inclusion of PICC in the orderbook, there are long-term O&M contracts available in the Middle East and Malaysia. Management is also serious with ramping up Industry 4.0 initiatives for O&G maintenance, and its three non-O&G apps are generating revenue and have long-term potential for carve-outs. Maintain BUY with a target price of RM4.30.

WHAT’S NEW

• Abundant Petronas-related opportunities. Despite having <20% direct Petronas exposure in its orderbook, Serba Dinamik Holdings (Serba) may benefit from the upcoming plant turnaround maintenance contracts of up to 5+5 years. This is in contrast to its existing 2+1 year Malaysian plant O&M contracts. According to the Petronas Activity Outlook, the number of plant turnarounds is expected to rise to 16 in 2019 (2018: 10), although man-hours may fall to 3.5m (2018: 4.3m). This implies Petronas is tilting towards longer-term tenures and integrated terms, in order to enhance economies of scale. Also, Petronas has secured six O&G exploration blocks in Mexico. Although this is in the initial exploration stage and may be only a very long-term opportunity, Serba has market access to the US (Houston) and Mexico via its investment in CSE Global.
• Ramping up Industry 4.0 capabilities: a) Automation: With CSE Global, Serba is able to combine leading industry automation and system integration technologies. b) Big data: Serba has partnered with VROC, which specialises in preventive maintenance solutions by using predictive analysis and machine learning (AI) to identify unscheduled breakdowns before they occur. This partnership was successful in a pilot project and is now executing an O&M contract from Petronas Carigali for big data analytics. c) Virtual and Augmented Reality (VR/AR): Serba is also adding on the VR/AR features in its O&M capabilities by digitalising the asset facilities and equipment. It is developing a proof-of-concept for its CNG plant utilising the wearable Microsoft HoloLens technology. Serba plans to implement it in its Pengerang Integrated Turnaround Centre, which allows for a real-time collaboration between experts in the centre and workers on the ground.
• Serba has signed heads of agreement with Hill International to jointly develop the RM0.5b Pengerang International Commercial Centre (PICC). This is separate from the RM0.7b PeIP, but is in line with guidance for the Pengerang development. Eventually, the PICC will form part of Serba’s EPCC orderbook, with works expected to start likely from 2019. In the long term, Serba may collaborate in Hill’s overseas projects.

STOCK IMPACT

• Long-term plans to monetise technology capabilities. Serba has commercialised three apps namely: a) QWIK Pay – a QR code payment solution, b) MyTPA – a digital clinic panel management system, c) GCE exchange – a digital content platform. Although the revenue base is negligible, the long-term plan for this is to grow sizeable big data, enhance profits, and possibly carve out these units as separate listings. There is no intention to raise funds nor sell the businesses, as they are already generating revenue and the existing cost resources to develop these apps are not major.
• Fundamental re-rating in tandem with orderbook. To recap, Serba’s orderbook had increased to RM6.9b. Once the partnership for PICC is concluded and construction begins, the orderbook will be close to the end-18 target of RM7.5b (2017: RM5.5b). The higher orderbook will contribute towards 2019 earnings. Given that Serba has equityowned capacities of 90MW and has guided to boost this to 200MW, the company is still expecting to secure more international projects in the medium term, covering Central and Southeast Asia. The recently-won RM0.3b Laos EPCC project may see further upside in value, pending the finalisation of the O&M contract and an additional hydropower capacity in the plans. The group is bidding for RM12b-13b global tenderbook.
• Forex impact. We assume that every 1% change in US$ to RM may impact net profit by 0.8%. For now, our forecasts assume conservative US$/RM of 3.80 for 2018 and 2019.

EARNINGS REVISION/RISK

• Maintain forecasts. Our key assumptions are: a) annual orderbook replenishments at ~RM2-3b (2017: RM2.4b), based on guidance of a 20-30% success rate of its global tenderbook, b) high orderbook renewal of >80%, mostly from O&M, c) average orderbook cover of about 2 years (O&M: 1-5 years; EPCC: 2-3 years).
• Risks. a) Cancellation and non-renewal of contracts, b) geopolitical risks, c) uncontrollable JV losses, d) US$/RM, e) Serba requires significant working capital (inventories, receivables) to grow its revenue. We expect working capital to be high for EPCC, but to ease gradually for O&M as a larger portion of orderbook gets renewed in future, f) execution – management guided that a large EPCC project for hydropower plants (2018- 20) may face delays in startup recognition (originally: 2Q18).

VALUATION/RECOMMENDATION

• Maintain BUY, and target price of RM4.30 pegged to 12x 2019F PE, at a premium to local smaller peer Deleum given Serba’s superior diversification, earnings growth (20-36% CAGR) and ROE of 23%. We expect further earnings re-rating on more potential contract wins/ execution. Our forecast is 3-12% above consensus.

Source: UOB Kay Hian Research - 1 Aug 2018