Serba Dinamik (Serba) 1Q17 core net profit came in at RM78.3m, in line with our expectations, constituting 27% of our full year forecast. While revenue fell 16.3% qoq, gross profit (GP) margin was relatively stable at 17.6%. Serba declared a maiden dividend of 2.2sen, on track to achieving our 25% payout of 5.5sen in 2017E. Post-IPO gearing stood at 0.1x. With results in line with our estimates, we maintain our earnings forecast, BUY rating and unchanged TP of RM2.40.

Sequential Decline Did Not Came as Surprise

Serba recorded a 1Q17 revenue of RM612.4m which fell 16.3% qoq mainly due to the O&M segment which declined 12.3% qoq on the back of lower maintenance activities particularly from the Middle East. This does not come as a surprise as Q4 has always been the group’s strongest and busiest quarter driven by the robust activities from Middle East, which generally make up more than 50% of Serba’s revenue. EPCC segment fell 42.7% to RM56.5m, on a higher base of RM98.5m in 4Q16 which is mainly contributed by Kota Marudu power plants project. Gross profit margin fell 0.3ppts qoq to 17.6%. Associate contribution saw a small RM0.4m loss which is pre-operation administrative expenses related to the Kota Madura project incurred at associate level. This is expected to continue for the remaining quarters before project commence in 2018.

Strong Backlog Continue to Underpin Future Growth

Current outstanding O&M and EPCC order book stands at RM4bn and RM800m as at end-1Q17. In our view, Serba remains a strong candidate to win upcoming plant maintenance works. Based on our channel check, there are close to US$30bn of new projects scheduled to be roll out in 2017 which consists of a combination of petrochemical plants and refineries mainly surrounding the Middle East region. We view this positively in the long run as demand for maintenance services should remain robust, which could benefit Serba due to its strong footing in the region. Also, Serba has submitted RM1.4bn worth of Pengerang jobs. Total tenderbook stands at RM10bn, out of which 70% are O&M and remaining 30% are EPCC related.

Maintain BUY With Unchanged Target Price

Our earnings forecasts for 2017-19E remain unchanged. We maintain our BUY call with the same 12-month TP of RM2.40, based on 11x on FY17E EPS. Key risks include: 1) unforeseen delays in the client maintenance schedule, and 2) margin deterioration.

Source: Affin Hwang Research - 22 May 2017