Serba is expected to raise c. RM515.35m (based on illustrative price of RM1.53/share) from its proposed private placement to partly repay borrowings and finance its projects. The group would be issuing up to 336.8m new shares (10% of share base excluding treasury shares). The primary objective of the placement is to finance its working capital requirements for its Abu Dhabi Innovation hub (RM7.7bn) and Data centre (RM1.5bn) projects. The proceeds raised thus far should be able to satisfy its working capital requirements until the end of FY21. Maintain BUY at lower TP of RM2.30 based on 13.5x FY21 EPS as we factor in the dilutive impacts (8% for FY21-22) of the placement.

NEWSBREAK

Serba is looking to raise about RM515.35m from a private placement to repay borrowings and finance its projects. The group would be issuing up to 336.8m new shares, representing 10% of its issued share capital of 3.37bn shares as at 30th of Nov 2020. The estimated proceeds of RM515.35m is based on an illustrative price of RM1.53 per share (10% discount to 5-day VWAP from 30 Nov 2020). The estimated proceeds are expected to be utilised in the following manner: (i) partial repayment of bank borrowings: RM100m, (ii) capex for its Teluk Ramunia yard: RM100m, (iii) working capital for its Abu Dhabi Innovation Hub project and Abu Dhabi Data Centre project: RM303.46m and (iv) private placement expenses: RM11.89m.

HLIB’s VIEW

Material dilution thus far through private placement exercises. While we understand that fund raising would be needed in FY21 due to its rapidly growing orderbook, revenue and weaker cash conversion cycle, we did not anticipate another equity raising exercise of this magnitude to happen this soon after its general mandate placement (RM456.7m raised) in May 2020 as we had initially expected another round of debt raising to happen first.

Sufficient funds to support working capital until FY21. The aforementioned fund raising exercise along with its current cash balance and debt facilities of RM2bn should be able to support its working capital requirements until FY21. However, Its cash conversion cycle would need to improve to avoid the instance of more equity raising exercises in FY22.

Outlook. While we believe that prospective job wins for Serba is expected to slow down in FY21, the trend of renewals for existing O&M contracts are still happening and we expect its O&M margins to be maintained going forward as there have been no contract renegotiations thus far. Its orderbook backlog of RM18.7bn would also be able to sustain its earnings growth in the next 2 years as the burn rate for the Block 7 and innovation hub contract is only expected to peak in FY22. However, we do not discount the possibility of further equity raising exercises to happen in FY22 if its cash conversion cycle does not improve.

Forecast. While there are no changes to our core earnings forecast, FY21-22 EPS is diluted by 8% to account for the higher share base post placement.

Maintain BUY with lower TP of RM2.30 based on 13.5x FY21 EPS. We maintain our BUY call on Serba after factoring in the dilutive impacts from the private placement exercise as we believe that (i) it would be able to maintain its high EBIT margins for its O&M division, (ii) the recurring nature of its O&M orderbook would ensure earnings sustainability in the foreseeable future and (iii) earnings are expected to grow exponentially in FY22 when its Block 7 project hits its peak earnings phase.

Source: Hong Leong Investment Bank Research - 9 Dec 2020