Serba has secured 1 O&M, 3 ICT contracts worth an estimated RM408.8m and 1 O&M contract with no specific value attached. The contract wins were within expectations, bringing current orderbook to RM18.9bn. 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. Group orderbook cover currently stands at 3.1x (EPCC: 15.0x, O&M: 1.6x (mostly recurring), ICT: 5.5x).

NEWSBREAK

Serba announced that it has been awarded 1 ICT contract from its wholly owned subsidiary SDITIL while its 75% Indonesian owned subsidiary PT SDI has secured 1 O&M contract and its 49%-owned associate of S2CIPL has secured 2 ICT contracts with an estimated combined contract value of RM408.8m. It has also secured 1 on-call O&M contract with no specific value from Malaysia.

HLIB’s VIEW

Contract wins within expectations. The aforementioned contract wins constitute c.2.1% of its previous RM18.7bn orderbook balance and increases it to RM18.9bn (O&M: 42%, EPCC: 47%, ICT: 11%). 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.

Outlook. We view the aforementioned contract wins positively as this is in-line with its target to expand its ICT footprint. We also foresee exponential earnings growth for Serba in FY22 when its RM7.7bn Block 7 project reaches its peak earnings phase and 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. Hence, we believe that Serba would be able to secure more large-scale contracts without the means of equity financing after it reaches the peak earnings phase for its Block 7 project.

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, (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 - 10 Mar 2021