2018 was another record year for Serba Dinamik (Serba) with net profit rising 25% yoy to RM388m. This was driven by the stronger overall operational and maintenance (O&M) performance– by country, UAE and Qatar posted the strongest growth as a result of new contract wins secured previously. Current outstanding orderbook at RM8.3bn (O&M: RM6bn; EPCC: RM2.3bn) is on track to achieving the RM10bn target by end-19. Serba declared a full-year DPS of 8sen, translating into a 30% payout ratio. Maintain BUY but with a lower 12-month target price of RM4.50 post a tax adjustment.

Another Record Profit Set in 4Q18

In its seasonally strongest quarter, Serba delivered a 4Q18 revenue that grew 23% yoy, largely driven by busy Middle East maintenance activities. Qatar’s contribution to total revenue grew to 24% in 4Q18 (4Q17: 12%) due to higher call-out jobs. EBITDA margin continued to show signs of improvement (+0.6ppts) to 17.4%. Overall, earnings were in line with our and consensus expectations at 97% and 99% of forecasts, respectively.

EPCC Picked Up Pace After 3Q Slowdown

EPCC revenue jumped 50% qoq to RM104m after work progress normalized in 4Q18. The UAE New Thunder Technicals contract saw higher billings while higher revenue was recognised on the chlor-alkali project in Tanzania at RM22m (as compared to RM7m in 3Q18). The PBT margin continued to remain stable at 16.2%.

Admin Expenses Increased Slightly, But Nothing Alarming

4Q18 administrative expenses were notably higher, constituting ~4% of total revenue as compared to the usual 3.5%. This was largely due to the cost relating to the recent sukuk issuance, and provision of bonus for the staff, which are one-off increases. Net gearing remains manageable, in our view, at 0.45x (from 0.35x in 3Q17).

Top Sector BUY Call

We lower our 2019-20E earnings by 4% after raising our tax rate assumptions (from 7% to 11%), factoring in the new Labuan tax regime announced in Budget 2019 where the RM20,000 tax ceiling was removed. We lower our TP to RM4.50 (from RM4.70), based on an unchanged 14x FY19E EPS, but maintain our BUY rating. Key risks include: 1) unforeseen delays in clients’ maintenance schedules, and 2) margin deterioration.

Source: Affin Hwang Research - 28 Feb 2019