Serba Dinamik (Serba) announced that it has entered into a Memorandum of Agreement (MOA) with Maju Holdings Sdn Bhd to acquire a 40% stake in the latter and to jointly develop a hydro power plant project in Perak. Serba will be deriving 3 income streams from this project: i) construction revenue at the early stage, ii) followed by its 40% associate profit, and iii) maintenance revenue upon the plant completion. Maintain BUY with RM4.20 target price based on 14x FY18E EPS.

Project Details

Serba will acquire a 40% stake in Maju Holdings and jointly develop 3 hydro power plants totaling 60MW. The power plants are split into 27MW, 19MW and 14MW and are located in Perak. The remaining 60% stake in the project will be evenly owned by Maju Holdings (Tan Sri Abu Sahid Mohamed is a major shareholder) and Perak Hydro Renewable Energy Corp (owned by Perak state government). The purchase consideration will amount to RM24.9m, which will be fully funded by its existing IPO proceeds. The power plant will supply electricity to TNB throughout a 21- year concession period.

Sweetened With EPCC and Long-term Maintenance Contract

Serba will also be undertaking a contractor role for the construction of the power plants, which is valued at approximately RM560m. The construction period is expected to commence by end 2QCY18 and be completed by end-2019. Assuming a 8% PAT margin, this is expected to contribute around RM45m profit over the construction period. On top of this, Serba is expected to perform O&M work on the power plant over the 21-year concession period, which is expected to contribute RM11m to its top line per annum.

Maintain BUY

We make no changes to our existing earnings forecasts as this falls under our orderbook replenishment assumption. Inclusive of this contract, total current outstanding orderbook now stands at RM6bn (O&M: RM4bn, EPCC: RM2bn). We maintain our BUY call with an unchanged target price of RM4.20 Downside risks: unforeseen operational hiccup or client maintenance schedule delay.

Source: Affin Hwang Research - 6 Feb 2018