Serba Dinamik’s (Serba) is on track to set another record-breaking year as 9M17 net profit has already achieved 93% of FY16A full-year profit. Serba recorded a 3Q17 net profit of RM68m, which brought 9M17 net profit to RM229.5m. We deemed this result to be above our and consensus expectations as 4Q is seasonally the strongest quarter for Serba driven by high levels of activity in the Middle East. Post our earnings upgrade and raising our target P/E multiple, we lift our TP to RM3.60 (from RM2.75). Maintain BUY. Another 1.5sen DPS was declared, bringing ytd to 5.2sen (on track to achieve its 30% payout). Current valuation, trading at forward 10x FY18E PER, continues to look undemanding.

Above Expectations

Serba booked 3Q17 revenue of RM653.3m (+0.6% qoq, +27.7% yoy), bringing 9M17 to RM1.9bn as O&M revenue increased by 21% and EPCC by 1-fold yoy. In tandem with the better revenue, net profit increased 48.7% yoy to RM68m. However, net profit fell 18% qoq as a result of a higher effective tax rate at 22% as compared to its historical 6-7%. This is more of a one-off event whereby IRB conducted a tax audit on the company for assessment years 2010-15. In 3Q17, Malaysia made up 31% of its total revenue, followed by Qatar (23%) and Bahrain (11%).

Better Expected 4Q Leads Us to Raise Our Earnings Forecast

9M17 net profit has achieved 79% of our 2017 full-year estimate. 4Q is usually Serba’s strongest quarter, driven by higher levels of activity from the Middle East. Given the satisfactory result and as we anticipate a stronger 4Q, we raise our FY17E earnings by 4%. We also tweak our 2018-19E earnings higher by 1-3% to fine-tune some earlier margin assumptions, which are partially offset by the higher expected effective tax rate moving forward at 10% (vs previous 6-7%). Total outstanding orderbook stood at RM5bn as at end 3Q17 with earnings visibility until 2021.

Maintain BUY; TP Lifting to RM3.60

Aside from the earnings upgrade, we raise our target P/E to 14x (from 11x) as we believe the company warrants a re-rating given its growth prospects and strong track record in securing contracts. We maintain our BUY call and lift our 12-month TP to RM3.60 (previously RM2.75). Key risks include: 1) unforeseen delays in the client maintenance schedule, and 2) margin deterioration.

Source: Affin Hwang Research - 22 Nov 2017