Serba reported its worst-ever quarterly core net profit of RM14.9m (-87% QoQ, - 90% YoY) in 6QFY21. Cumulatively, 18MFY21’s core net profit of RM722m missed our full-year forecasts by 10%. Pending the outcome of the Special Independent Review (SIR) report from EY, which is expected to be released next month, we recommend investors to shy away from Serba for the time being, at least until all the audit issues have been clarified. Hence, we maintain SELL on Serba with a lower TP of RM0.24 (from RM0.28 previously) based on 0.2x FY22F (from 0.3x FY21) BVPS. We continue to assume that no dividends will be paid out in FY22-23.

Below expectations. Serba’s 6QFY21 core net profit of RM14.9m (-87% QoQ, -90% YoY) and 18MFY21’s sum of RM722m missed our full-year forecasts by 10%. Consensus estimates are not meaningful due to the distortion arising from the change in financial year-end from December to June. We derive 18MFY21 core net profit after adjusting for a RM17.7m of forex gain and a one-off gain of RM20m from its repurchase of its Sukuk programme.

Dividend. None declared, as expected. 18MFY21 dividends totalled up to 5.45sen/share. In June 2021, both Fitch Ratings and S&P Global Ratings have downgraded Serba Dinamik’s rating – mainly to reflect its elevated refinancing risk for its US$222mil sukuk, which is due May 2022. With that, we will be taking a conservative stance by assuming no dividend payouts for FY22-23 as we strongly believe the group will need to preserve cash for working capital and managing its short-term debt maturities. The group’s net debt and gearing stood at RM3.4bil and 0.89x as at end-June 2021 (vs. a net debt and gearing of RM2.3bil and 0.76x as at end-June 2020).

QoQ. Core profit was down -87% due to weaker performances from all of its business divisions, peculiarly its O&M segment. Regionally, we note lower revenue contributions from Malaysia (-6%), Saudi Arabia (-67%) and Bahrain (-90%).

YoY. Core profit was down -90%, attributed to lower profit contributions from all of its business divisions.

Outlook. Pending the outcome of the Special Independent Review (SIR) report from Ernst and Young (EY), which is expected to be released in October 2021, we advocate investors to shy away from Serba for the time being, at least until all the audit issues have been clarified. We are also wary that there has been a significant reduction of investor engagement after the revelation of recent events. Even if the verdict of the SIR is to be in favour of Serba Dinamik, we reckon that its share price may not return to its previous levels as institutional investors would factor in higher risk assessments due to corporate governance, be it perceived or otherwise.

Forecast. We reduce our FY22-23 forecasts by 34% for both forward years under review as we trim our orderbook replenishment assumptions to RM3.5bil and RM6.3bil respectively (from RM9.6bil and RM7.8bil previously).

Maintain SELL with TP of RM0.24 based on 0.2x FY22 BVPS. We maintain our SELL recommendation with a TP of RM0.24 (from RM0.28 previously) based on 0.2x FY22F (from 0.3x FY21) BVPS.

Source: Hong Leong Investment Bank Research - 30 Sept 2021