Serba Dinamik’s (Serba) 3Q18 earnings rose 22% yoy driven by a better O&M performance. EPCC segment saw a weaker quarter due to a slowdown in work on UAE’s New Thunder contract. Nevertheless, EPCC activities are likely to rebound in 4QFY18, and with the Middle East maintenance activities, should help drive 4Q18 earnings. Serba declared a 1.7sen DPS, bringing the ytd payout to 5.7sen. Maintain BUY with a 12-month target price at RM4.70.

3Q18 Profit Rose 22% Yoy – Supported by O&M

Serba’s 9M18 results came in within our and consensus estimates, comprising 70% and 71% of our and the street’s full-year estimates. Seasonally, 4Q is the strongest quarter given the robust Middle East maintenance demand. 3Q18 revenue jumped 18% yoy driven by higher O&M revenue which rose 23%, notably on the Agility Energy (UAE) contract. The revenue improvement also helped lift the EBITDA margin by 0.7ppts, which should help alleviate investor concerns on margins.

Short Blip in EPCC; Likely to Pick Up Pace in 4Q18 and FY19

3Q18 posted EPCC revenue of RM69.2m, which fell 13% qoq and 17% yoy. Sequentially, the drop was due to lower recognition from the New Thunder Technical (UAE) contract. This negative impact was partly cushioned by the maiden recognition of the chlor-alkali project in Tanzania. We expect 4Q18 to post stronger qoq results, supported by higher recognition of the New Thunder work, chlor-alkali plant in Tanzania, the water treatment plant in Terengganu and Kota Marudu hydropower plant (construction of the other 2 plants will be completed in 1Q19, with project completion now at 80%).

Top Sector BUY Call

We reiterate our BUY call as we continue to like the group’s strong growth prospect. We believe the contract replenishment pipeline will remain robust underpinned by its commitment to grow the current 120MW asset portfolio to 200MW. This, coupled with its ability to deliver promising results, should lead to a rerating of the stock. We maintain our BUY rating with an unchanged 12-month target price of RM4.70, based on 14x FY19E EPS. Key risks include: 1) unforeseen delays in the client maintenance schedule, and 2) margin deterioration.

Source: Affin Hwang Research - 28 Nov 2018