We recently hosted Serba Dinamik and CSE Global management on a NDR to Singapore. Investors remain upbeat with Serba and most had not met CSE in a long time. As this was also the first time both companies were seen together post deal closure, most were interested in acquisition synergies. We see further upside to Serba’s EPS growth with CSE riding on a favourable outlook in the shale-oil production space. Reaffirm BUY and TP of RM4.70; country top pick.

The “Million Dollar” Question

Investors were generally interested as to how Serba’s 24.8% stake in CSE would deliver synergies. The respective management teams addressed the issue on a few fronts: i) Serba would leverage on CSE’s network in the US/Australia, while CSE would benefit from Serba’s network in the Middle East, Malaysia and Central Asia, ii) market penetration time can be sped up by leveraging on respective current facilities, and iii) more product offerings and technical exchanges. For instance, Serba was recently invited for a potential job in Mexico by Petronas where it recently secured 6 blocks. As Serba has no existing facility in the region, it is able to make use of CSE’s facility, enabling them to pass the first stage of consideration.

Serba’s Asset Construction Progress

The Terengganu water treatment plant saw a construction slowdown in 2Q18 due to delays in obtaining permits after the change in government and project financing delays. However, these issues have been resolved and should allay investor concern as we anticipate a stronger 3Q project contribution. Meanwhile, Serba is on track to complete the construction of the 3 hydropower plants in Kota Marudu by end-2018. The construction work for 60MW hydropower plant in Perak is guided to start in 4Q18.

Targeting a Few More Hydropower Projects

Serba currently has 3 hydropower plants under its asset portfolio from Kota Marudu, Sabah (29.1MW), Perak (60MW) and Laos (30MW). With current capacity at 120MW, Serba is confident in securing a few more hydrobased projects, and aims for a total asset capacity of 200MW. This would further boost its orderbook size nearer to its end-2018 target of RM7.5bn (from RM6.9bn currently), by securing the construction contract as well as the plant-maintenance concession. Once completed in 2020, the current portfolio should contribute c. 10-15% of total group profit.

Source: Affin Hwang Research - 21 Sept 2018