Serba Dinamik announced that it will be developing a Pengerang Integrated Development Complex which will be located close to Petronas’ Pengerang Integrated Petroleum Complex. We are positive with this news as the proposed development once completed will serve as a one-stop hub as management envisions the uprising demand for plant maintenance services for Petronas’ US$27bn petrochemical complex and refinery. We continue to like Serba for its strong earnings prospect. Maintain BUY with a higher 12-month TP at RM2.75.

Project Overview

The proposed Pengerang Integrated Development project will occupy a total land size of 132 acres, which can be segregated into 3 portions - Pengerang Eco-Industrial Park (PEIP), Pengerang International Commercial Centre (PICC) and Northshore Residence. Serba will be acting as the main EPCC contractor for the overall project and construction is expected to commence in 2018.

First and Second Part – PEIP & PICC (100% Stake)

Management has signed a memorandum of understanding to purchase 16 acres of land from Izin Budi Sdn Bhd for a purchase consideration of c.RM25m. The remaining 47 acres land will be paid for a price based on 7% of total GDV or about RM56m. Serba intends to build its maintenance, repair or overhaul (MRO) and inspection, repair & maintenance (IRM) centres to service the petrochemical complex and refinery once they are fully operational from 2H19 onwards. Total gross development costs (GDC) for both projects work out to be RM666m, which Serba owns a 100% stake. Serba is expected to complete the project in 2020 and 2021, respectively.

Third Part – Northshore Residence (30% Stake)

For the Northshore residence which Serba hold a 30% stake, total GDC is valued at RM511m, which is expected to be completed in 2 phases (Phase 1: 2020, Phase 2: 2022). AlMurisi Holding Sdn Bhd, which owns the remaining 70% stake, will be injecting the land. Based on our estimate, Serba’s project funding works out to be RM655m based on 80:20 debt-to-equity ratio. We understand that the group is in the midst of finalising the necessary funding for the entire project. With current gearing level at 0.16x, this gives Serba ample room to leverage up its balance sheet.

P&L Impact Only From 43% of Total GDC

Based on our assessment, the reported GDC value of RM1.2bn will not fully translate to earnings for Serba. For the PEIP and PICC projects, which Serba holds 100% stakes, the total GDC being recognised will be capitalised under PPE (balance sheet item). Hence, no earnings impact in the P&L. The income derived from the project will either be via sales or rental proceeds upon completion of the construction. On the other hand, the only construction value that has a P&L impact will be coming from Northshore Residence, which Serba holds a 30% stake. This works out to RM511m in contract value, which fall under our FY18E orderbook replenishment assumption. Based on building works PBT margin of 10%, we estimate the Northshore Residence will contribute RM51m earnings over 4 years period. We expect Serba’s 30% stake share of property development profit from the sales of property to commence only from 2020 onwards, once first phase work has been completed.

Turning More Positive on Future EPCC Replenishment

We did a minor adjustment to our FY18-19E earnings estimate to factor in another RM500m orderbook replenishment as our current assumption has already been met following the announcement of this construction work. However, earnings upside from the additional replenishment is partly offset by the expected higher finance cost moving forward as Serba raise more financing for this proposed project. We also expect capex spending to doubled to RM400m in FY18 against our RM200m estimates in FY17.

BUY Serba; TP Lifted to RM2.75

We maintain our BUY call with higher TP of RM2.75 as we roll forward our valuation year to 2018E, based on unchanged PER of 11x.

Key Risks to Our Call

Downside to our BUY call includes: 1) unforeseen delays for the client maintenance schedule, and 2) margin deterioration.

Source: Affin Hwang Research - 21 Aug 2017