Serba has secured 1 EPCC, 2 O&M and 2 ICT contracts worth an estimated RM465.9m and 4 O&M contracts with no specific value attached. The contract wins were within expectations, bringing current orderbook to RM18.7bn. We opine that Serba is still expected to record strong earnings going forward despite the volatility and challenges in the O&G industry due to its strong and sustainable earnings from its O&M segment and growing EPCC orderbook. Maintain BUY with TP of RM2.50 based on 13.5x FY21 EPS.

NEWSBREAK

Serba has announced 1 EPCC, 1 O&M and 1 ICT contract from its wholly owned subsidiary SDIL while its 75% Indonesian owned subsidiary PT SDI has secured 1 O&M contract and 1 ICT contract with an estimated combined contract value of RM465.9m. It has also secured 4 on-call O&M contracts with no specific value from Malaysia. Its biggest contract secured is its O&M contract for the provision of plant maintenance services to Najmat Maisan Technical Services from UAE, constituting about c.15% of the RM465.9m aforementioned contracts secured.

HLIB’s VIEW

Contract wins within expectations. The aforementioned contract wins constitute c.2.5% of its previous RM18.5bn orderbook. While we view this as a positive development for the Company, the contract wins were within expectation and is not expected to increase its earnings significantly. The contracts secured will increase its current orderbook backlog from RM18.5bn previously to RM18.7bn (O&M: 40%, EPCC: 49%, ICT: 11%).

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.

Forecast. We make no changes to our forecast as the contract wins were within our expectations.

Maintain BUY at unchanged TP of RM2.50 based on 13.5x FY21 EPS. We maintain our BUY call on Serba 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 despite lower prospective contract wins in FY21 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 - 10 Dec 2020