We recently hosted a non-deal roadshow for Serba in Singapore, where investors were overall impressed with the group's exponential growth in the past few years despite the sector downturn. We expect a higher order book replenishment in FY18E as it rides on the favorable oil price outlook. This coupled with the current all-time-high order book of RM5.3bn should drive better earnings growth in FY18E. In addition, the success in penetrating new markets will lift earnings. All these factors prompt us to raise our EPS by 11% in FY18-19E. We reaffirm our BUY call with a higher TP of RM4.00.

Entering a Fast Growth Pace

Management highlighted that EPCC will be a key piece of the puzzle to drive FY18 earnings growth. Beyond organic growth, Serba will also look out for potential acquisition targets which will allow it to strengthen its presence and penetrate new markets (ie: nearby SEA regions, Africa, Kazakhstan etc). Serba's strategy to expand into asset ownership business will continue to provide decent investment returns as total investment costs can generally be recovered by the early EPCC contract secured. To date, Serba has invested ~RM70m in equity, and in return has secured RM1.3bn worth of EPCC jobs (Fig 1). In addition, the associate profit and long-term maintenance service contracts will provide further upside to earnings.

Nothing to Worry About Qatar

The meeting also allayed some investors’ concern on the unresolved Qatar crisis. Contrary to some expectations of a lower Qatar contribution, work activities from the region remain unaffected and even surpassed Serba’s expectations. In 3Q17, Qatar’s contribution to total revenue increased to 23% vs. 18% in 2Q17. Management foresees higher work opportunities going forward as Serba continues to fill the vacuum left by contractors that have pulled out of the region, providing a boost to FY18E earnings.

Maintain BUY

Factoring in the above catalysts, we raise our FY18-19E earnings higher by 11% as we lift our total order book replenishment to RM4bn (from RM3bn). We believe our replenishment target remains conservative and achievable given management’s efforts to expand its asset ownership. We raise our TP to RM4.00 (from RM3.60) based on an unchanged 14x FY18E PER. Serba remains one of our country top picks. Downside risks: unforeseen operational hiccup or client maintenance schedule delay.

Source: Affin Hwang Research - 13 Dec 2017