Serba Dinamik (Serba) has successfully penetrated into Laos, a new market, by securing a total 30MW hydropower EPCC contract. Serba is also looking at acquiring a 15% stake in Green & Smart Holdings (GSH) to further expand its asset portfolio and increase the EPCC orderbook. We are delighted with Serba’s success in penetrating into a new market and enhancing its long-term outlook by securing more EPCC contracts. Serba continues to be our high-conviction O&G top buy idea. Maintain BUY and target price at RM4.70 for 32% upside.

Maiden Contract in Laos

Serba announced that it has secured an EPCC contract with Nam Taep 1, 2, 3 Hydropower Company Limited to build a total 30MW hydropower plant in Laos for US$66.2m (RM268.8m). This contract is expected to commence on 19 July 2018 and run for a 43 months period, ending in early 2020. Physical construction work is expected to commence by 1Q19 at the earliest.

Acquisition to Strengthen Asset Base and More EPCC Contracts

Separately, Serba will also subscribe for a 15% stake in London-listed GSH for a purchase consideration of £3.2m (RM17m) via a private placement exercise, to be completed by 3Q18. This will be done via 20:80 equity-debt financing, which translates to RM13.6m in borrowings, although we do not expect this to strain its balance sheet (FY18 net gearing at 0.5x). Based on GSH’s audited figures, the 15% stake is expected to contribute RM2m to Serba's associate profit, which is <1% of FY19E PBT.

Long-term Earnings Lucrative From Acquisition

We are very positive on this acquisition as it will give Serba edge to secure more biogas power plant EPCC contracts. We understand that GSH has an additional 8 biogas plant contract bids in Malaysia, total contract value in the range of RM200m, which should be awarded soon (the first 2.7MW biogas plant was awarded by GSH to Serba in Feb-18). In addition, Serba also plans to leverage on its expertise to bring biogas power plants into Indonesia. Management has identified Indonesia as a huge market with over 1,000 palm-oil processing mills.

Maintain BUY; RM4.70 Target Price

We continue to be bullish on the outlook of the company, underpinned by its success and ability in securing new contracts. We expect stronger earnings momentum in 2H18 to be a near term catalyst. We maintain our BUY rating and 12-month TP of RM4.70, based on 14x 2019E EPS.

Source: Affin Hwang Research - 20 Jul 2018