We have recently participated in a conference call with Serba on its auditor’s (KPMG) request for an independent review on its financials. The request was done to ensure the accuracy of findings of the statements presented by the management and Serba has re-iterated that it has not been engaged in any fraudulent activities. Nevertheless, we choose to remain cautious on this matter. Hence, we downgrade our Buy call to a HOLD at a TP of RM1.45 (from RM2.30) based on 6.75x (from 13.5x; 50% discount) to account for the uncertainties regarding the independent review process. We believe the stock would deserve a re-rating if the independent-review process is completed without any negative findings.

We attended Serba’s briefing on its auditor’s request for an independent review on its Company accounts with the following key takeaways:

Request for an independent review. Serba’s auditor (KPMG) has requested an independent review of its Company accounts to ensure the accuracy of findings of the statements presented by the management of Serba. This would not be a targeted audit on any individual projects or subsidiaries as the Company would be audited on its entire operations. Serba has re-iterated that it has not been engaged in fraudulent activities and the basis of the audit does not relate to fraud.

Cause of the delay in results announcement and request for independent review.

The Company has mentioned that Covid-19 was the main cause of the delay as it has made the entire audit process more difficult due to its myriad of subsidiaries operating in more than 30 countries. The independent review will also be done on aspects which are not within KPMG’s scope.

Change in financial year end and timeline of the independent review process.

Serba has decided to change its financial year end from December to June to streamline the whole audit process. The current financial year (FYE June) will be audited on an 18 months basis (January 2020 to June 2021) while the independent review is expected to take a minimum of 3 months and its 15MFY21 financial result is expected to be announced by the end of June 2021.

Outlook. We believe that the uncertainties pertaining to the independent review process will bring about jitters to the stock as Serba was the only Company above a market cap of more than RM5bn to have received an independent audit request since the beginning of MCO.

Forecast. We have adjusted our earnings forecast to reflect the change in FYE. Hence, we have introduced new earnings forecast for 18MFY21 (RM909m), FY22 (RM803m) and FY23 (RM845m).

Downgrade to HOLD with TP of RM1.45 (from RM2.30). We have downgraded our TP from RM2.30 to RM1.45 based on 6.75x PE (from 13.5x; 50% discount) on FY22 EPS to account for the uncertainties regarding the independent review process. Nevertheless, we believe that the stock would deserve a re-rating should the independent review process be done without any negative findings.

Source: Hong Leong Investment Bank Research - 27 May 2021