Serba Dinamik (Serba) reported a strong set of 1Q19 results – revenue, EBITDA and net profit all achieved new highs. This was underpinned by both stronger maintenance activities, with Malaysia showing the largest growth, and EPCC revenue expansion as more of the asset ownership projects gradually commence construction. Serba declared a higher interim dividend of 2.3sen (vs. 1.9sen in 1Q18). We reiterate our BUY call with a higher TP of RM5.50.

Net Profit Registered a Healthy 21% Growth

Serba’s 1Q19 net profit of RM112m (+21% yoy) was in line with expectations, accounting for 24% of our and the street’s forecasts. 1Q19 revenue was up 35% yoy lifted by higher O&M (+35%) and EPCC (+18%) contributions. Malaysia registered the strongest growth in 1Q19 (31% of total revenue from 27% back in 1Q18) among rest of the regions, mainly driven by the higher activities from Sarawak (PCSB’s onshore MCM contract, Sarawak Shell and MLNG). EPCC revenue increased 18% yoy, partly attributed to the maiden contribution from its Laos hydropower plant project. The asset projects’ construction now makes up 40% of total EPCC revenue. We expect EPCC revenue to be progressively higher in the coming quarters as the Laos project commenced construction in 2Q19 while the Tanzania chlor-alkali plants now still at the design stage will see higher recognitions from deliveries of equipment.

Things About to Get Busy

Management guided that the 2019-20 capex spending will likely increase to RM500m (from RM450m), in preparation for new contracts the group is looking to secure. The group borrowings are also expected to increase by an additional RM600m in 2Q19 as it draws down its sukuk to fund its potential contracts. As a result, we expect finance costs to increase by around RM19m in the 2H19, which is still manageable.

Positive on Serba; BUY

Serba’s earnings growth profile remains attractive backed by its RM8.3bn orderbook, comprised of RM6.1bn O&M and RM2.2bn EPCC works. The group continues to be active in bidding for new contracts with its tenderbook now at RM15.8bn (local and overseas split 25:65; O&M, EPCC split 60:40). We maintain our BUY rating with a higher 12-month target price of RM5.50 (from RM4.50), based on an unchanged 14x PER rolled forward to FY20E EPS.

Source: Affin Hwang Research - 30 May 2019