Serba Dinamik (Serba) announced a 42.3% stake investment in E&E Gas Sdn Bhd and RM333m EPCC contract. Job wins ytd have exceeded our expectations, reaffirming our bullish stance on the company. Over the past 2 years, a total sum of RM326m has been invested in various companies (mostly via an associate stake) and in return, Serba has secured RM2.3bn worth of EPCC jobs. We maintain our BUY call with a 12-month target price of RM4.70.

Secures RM333m EPCC Contract

Serba announced the investment of a 42.3% stake in E&E Gas for a total sum of RM26.4m, split into RM16m of shares and RM10.4m of RCPS. The RM16m will be through a 10-acre land injection, while the RCPS portion will be settled in cash. In return, E&E Gas has awarded Serba a RM333m EPCC job for the construction and commissioning of an onshore liquefied natural gas (LNG) distribution infrastructure facility in Lumut, Perak. Physical construction is expected to start in 2H19 at the earliest or 1Q20 at the latest, and targeted to be completed in 2 years (end-2021).

Understanding the Project

This proposed facility will function like a “storage and distribution hub” which is nearly similar to Dialog’s (DLG MK, RM3.39, HOLD) tank terminal business model. E&E will charge a “tolling fee” for the storage of LNG and distribution services via ground tankers. Meanwhile, the sourcing of LNG supply and securing buyers are taken care of by the offtaker (ie: customers of E&E Gas/Serba). This project will help reach more LNG users which have currently limited access to the natural gas pipeline. This is Serba’s second natural gas project following the project in Muaro Jambi, Indonesia.

Order Book Marks a New High

With this job in hand, ytd contract wins now total RM2.5bn which has exceeded our expectation, putting the total outstanding order book at RM7.5bn. The O&M portion accounts for RM5bn of the order book, while EPCC makes up the remaining RM2.5bn. We remain positive on Serba as it continues to demonstrate its strong order book replenishment ability.

Maintain BUY and RM4.70 Target Price

We maintain our BUY rating and TP of RM4.70, based on 14x 2019E EPS. Key downside risks include: 1) unforeseen delays in the client maintenance schedule, 2) non-renewal of O&M contracts and 3) margin deterioration.

Source: Affin Hwang Research - 1 Nov 2018