We remain positive on Serba as we believe that the Company has already secured enough financing for its working capital requirements for the Abu Dhabi data centre and innovation hub project. We also note that the recent placements were partially done to strengthen its balance sheet for the Company so that it can secure more projects in the future. Its existing credit facilities of c.RM2.5bn would also serve as a strong avenue for the company to raise funds for future projects if need be but the Company maintains that reducing its net gearing is currently one of its priorities. Maintain BUY with TP of RM2.30 based on 13.5x FY21 EPS.

The Following Are the Key Takeaways From Our Recent Meeting With Management:

Private placements potentially done to undertake future projects. We believe that the recent private placements from Serba could be done to strengthen its balance sheet to secure more projects in the future. Our channel checks suggest that Serba is currently bidding for 3 EPCC projects from Abu Dhabi and 1 EPCC project from Saudi Arabia with a total contract value of c.USD1bn (RM4bn). We believe that the prospects of Serba winning at least 2 of these contracts are high but we did not include the potential job wins into our valuations to be conservative.

No more equity raising needed for Block 7 and Data Centre project in Abu Dhabi. While the private placement exercises have brought about negative sentiments to the Company due to its dilutive impacts, we are confident that Serba has raised enough funds to meet its working capital requirements for the aforementioned projects. Both projects would be done in 4 phases with progress payment receipts whenever a project milestone is achieved. Additional working capital requirements in FY21 for the aforementioned project will amount to RM650m (Data Centre: RM400m, innovation hub: RM250m) and working capital requirements for FY22 is expected to amount to c.RM500m after the factoring in progress payments receipts. However, we are unable to rule out the instance of further equity raising exercises in FY22 if it secures at least 2 of the aforementioned EPCC projects.

Lower net gearing and ample credit facilities. Post private placements, Serba's net gearing will fall from 0.8x to 0.5x, which can be considered healthy. It also has an i MTN debt facility worth RM1.5bn and various revolving credits/term loan debt facilities amounting to RM1bn. This would mean that Serba would have total drawable debt facilities amounting to RM2.5bn. Based on Serba's lower net gearing level and availability of debt drawdown facilities, we believe that this spells the end for equity raising exercises for existing projects. However, the instance of a potential equity raising exercises would only appear in FY22 if Serba were to be successful in securing more large scale EPCC projects.

Usage of Teluk Ramunia yard. Teluk Ramunia currently has 3 yards (i) Yard A for decommissioning and waste management works, (ii) Yard B for marine works, storage, IHUC and TMM and (iii) Yard C for fabrication works. Yard C is currently being used for fabrication of structures for its Abu Dhabi innovation hub and data centre projects and yard B is currently used as a storage facility for fabricated structures. Serba is still in the midst of tendering for O&G projects for its yard and the Company believes that it can secure something of material value by the end of FY21. Yard utilisation will be at 50% at maximum capacity without O&G works.

Outlook. Despite the sizable private placement exercises that has been carried out thus far, we remain positive on Serba Dinamik as it still has plenty of potential to improve on its orderbook backlog. We believe that the Company's balance sheet will improve significantly when it reaches the tail end of its Abu Dhabi data centre and innovation hub project in 2023 and this will enable Serba to secure more EPCC projects without using equity as a means of financing. Its track record and experience would be a key factor with regards to the securement of more contracts from the Midde-East. Its stable O&M business is also expected to continue to provide sustainable and strong earnings to the Company.

Forecast. No Changes

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, (iii) earnings are expected to grow exponentially in FY22 when its Block 7 project hits its peak earnings phase (iv) its cleaner balance sheet would allow the Company to take on more projects in the future and (iv) no further private placements are expected to be carried out for data centre and Block 7 project.

Source: Hong Leong Investment Bank Research - 25 Jan 2021