Serba’s upcoming 4QFY17 results will likely surprise on the upside, supported by robust maintenance work activities in the Middle East (ME) and further boosted by additional works from the Qatar region. Based on its 2016 earnings pattern, 4Q yields the best quarterly earnings as it contributes ~40% of its full-year earnings. We remain upbeat on Serba earnings as we raise our estimates and reiterate our BUY call with a higher target price of RM4.20, based on an unchanged 14x FY18E EPS.

EPCC Will Help Drive Higher Earnings Growth

We project FY18 revenue to increase by 28% yoy underpinned by stronger O&M and EPCC revenue, which should see growth of 19% and 91%, respectively. The EPCC segment will be playing a bigger role in earnings moving forward (from 10% of total revenue in the past to 20% moving forward) as construction work of the asset projects commence. Upon completion, Serba will begin to recognise the equity profit as well as revenue from its long-term maintenance service agreement, providing it a recurring income stream. In 2017, the group invested into 3 water-based assets (ie, water treatment plant, water management and desalination plant and chlor-alkali plant) as well as expanding its presence in Pengerang, Johor through its Pengerang Integrated Development project, which consists of Malaysia’s first MRO & IRM global centre of excellence and plant turnaround facility.

Raising 2017-19E EPS by 4-7%

Given the likely stronger-than-expected 4QFY17 results, we raise our FY17E earnings by 7% and FY18-19 estimates by 4-5%. We believe there is room for consensus earnings to be re-rated, which are currently ~10% lower than our estimates. 4Q is seasonally the strongest quarter as the ME enters into the winter season, leading to higher maintenance activities demand in the ME.

Maintain BUY

We raise our target price to RM4.20 (from RM4.00) post our earnings upgrade, based on an unchanged 14x FY18E EPS. The current valuation trading at 11.1x forward FY18E PER look attractive as compared to the average sector PE of 17x. The strong momentum in global oil prices of late could speed up the timeline for potential contract wins, which could be a catalyst for the stock. In addition, any potential M&A deal as guided could re-rate the stock higher.

Source: Affin Hwang Research - 12 Jan 2018