We continue to be bullish on Serba’s earnings prospects and expect another record profit in 2018 backed by stronger O&M and EPCC segments. We raise our 2019–20E earnings forecasts on a more positive outlook on the Central Asia regions and normalisation in its tax rate. We affirm our BUY rating with a higher TP of RM4.70. At 12x forward PER, valuation is undemanding given its favourable outlook. Serba is our sector top pick.

EPCC Growth to Outshine O&M

We expect Serba to deliver another record profit in FY18E spurred by both higher operational and maintenance (O&M) and engineering, procurement construction and commissioning (EPCC) work flows. EPCC contribution is expected to outshine the former as Serba starts executing c.RM1bn of asset projects secured in 2017, which consists of Terengganu’s water treatment plant in Terengganu, hydropower plants in Sabah and Perak, and a chlor-alkani plant in Tanzania.

Re-rating Catalyst From Potential Acquisition

A recent press report by the Nikkei highlighted that Dato Karim (Group CEO) is looking to close a few deals which could be worth up to RM350m combined. This strategy would help the group to strengthen current product offerings and service capabilities or expand into new geographical locations. We believe this could potentially cause some excitement in the stock.

Aiming to Hit Another All-time High Orderbook

Serba has come a long way since its IPO - growing its orderbook from RM3.6bn in early-17 to RM6.2bn currently. Management targets to grow this to RM7.5bn by end-18, which would imply c.RM2–2.5bn of new contract wins (excluding renewals). We believe this could materialise from new O&M jobs, more asset-based EPCC jobs and through potential acquisitions.

Maintain BUY; Higher 12-month TP of RM4.70

Business prospect remains strong and we continue to recommend this stock based on its: i) strong earnings growth, ii) potentially securing more asset projects, iii) growth from inorganic M&A opportunities, iv) aboveaverage ROE of 26% vs peers, and v) promising opportunities from Central Asia. We reiterate our BUY rating with higher TP of RM4.70 (from RM4.20) based on unchanged 14x PER on rolled forward FY19 EPS.

Source: Affin Hwang Research - 13 Apr 2018