Serba has secured 8 O&M (c.RM350m) and 1 ICT (c.RM200m) contracts worth an estimated RM548.2m. Serba has also secured 1 O&M and 1 EPCC contract with no specific value attached. The contract wins were within expectations, bringing current orderbook to RM18.7bn (flat QoQ). 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 RM2.30 based on 13.5x FY21 EPS.

NEWSBREAK

Serba has announced that it has won 8 O&M contracts from its 75% owned Indonesian subsidiary PT SDI and 1 ICT contract from its wholly owned subsidiary SDITL with an estimated combined contract value of RM548.2m. It has also secured 1 on-call O&M contract and 1 EPCC contract with no specific value from Malaysia. Its 6 15-year Supply Super Ultima O&M contracts constituted about c.70% (RM330m) of the RM548.2m of contracts secured.

HLIB’s VIEW

Contract wins within expectations. The aforementioned contract wins constituted c.3% of its previous orderbook balance (RM18.2bn). 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. With these contracts, its current orderbook backlog now stands at RM18.7bn (EPCC: 47%; O&M: 41%, ICT: 12%)

Outlook. Serba’s strong showing from a profitability standpoint is expected to continue in FY21 due to its large orderbook backlog of RM18.7bn. Its orderbook backlog 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. We also view that the instance of a potential equity raising exercise in the future is low as Serba has raised enough funds for its working capital requirements for its Abu Dhabi innovation hub and data centre projects.

Forecast. We Make No Changes to Our Forecast as the Contract Wins Were Within Our Expectations.

Maintain BUY with TP of RM2.30 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 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 - 19 Jan 2021