Serba Dinamik (Serba) targets to achieve an orderbook of RM10bn by end-2019. Prospects to grow its EPCC segment remain promising with ample hydropower and utilities projects up for grabs with net gearing still at a comfortable 0.56x by our FY19 estimates. Serba remains our country and top sector pick with a RM4.70 target price.

On Track to Achieving Its 200MW Target

Serba now has 120MW of assets in its portfolio, and is actively pursuing new projects in Indonesia, Laos and Vietnam. The group targets to achieve an orderbook of RM10bn by end-2019 by securing new EPCC contracts (also investing in small equity stakes). Meanwhile, the Middle East (UAE, Saudi Arabia and Qatar) and Central Asia (Africa) remain the few key regions with more available O&M jobs in 2019.

Bullish on Downstream Plant Turnaround Activities

Based on the latest Petronas 2019-21 Activity Outlook, the outlook for plant turnaround activities has turned bullish, revising from 3.5m man hours to 8.1m man hours. This translates to an incremental 4.6m additional man hours which is positive as plant turnaround also yields higher margins compared to other O&M jobs. This could potentially boost contribution from Malaysia (3Q18: 29%), leading to upside potential to our FY19E earnings.

Most Asset Construction to Commence in 2019

Earnings growth from its EPCC segment next year should mainly come from its Terengganu water treatment plant (~RM235m outstanding EPCC value), Tanzania chloro-alkali plant (~RM315m), Laos 30MW power plant (~RM275m) projects (all with small equity investments), and UAE’s New Thunder project (~RM100m). The construction of a 60MW hydropower project in Perak will likely see a slight delay, now targeted to start construction in early 3Q19, while the recently invested LNG project is on track to commence construction in 4Q19.

Reaffirm BUY Rating and Target Price of RM4.70

In our view, the recent drop in the share price provides a good opportunity to accumulate the stock, on the expectation of stronger growth prospects in terms of earnings delivery and order-book replenishment. We reaffirm our BUY rating and 12-month TP of RM4.70, based on 14x 2019E EPS.

Solid fundamental with more compelling valuation

Current 2019E PER for Serba at 10.9x looks appealing, which is down from 13x since October 2018. Despite so, the group’s fundamentals remain solid as earnings continue to grow strongly and more contracts being announced pushing the current outstanding order book to RM7.5bn. We expect Serba to record a 23% EPS growth in 2019E premised on a stronger EPCC recognition, and supported by a more robust O&M activities.

Key risks

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 - 27 Dec 2018