Serba’s strong 2Q19 performance was mostly driven by high maintenance activities in Malaysia and Qatar, and the Tanzania chloralkali project. We expect earnings to remain robust moving into 2H supported by a seasonally strong 4Q maintenance quarter in the Middle East. We reaffirm our BUY rating and target price of RM5.50.

RM1bn Milestone Achieved for Its Quarterly Revenue

2Q19 net profit increased 27% yoy to RM130m, on the back of the 42% growth in revenue. By segment, O&M revenue grew 32% yoy benefiting from higher work orders from Qatar and Malaysia, while EPCC revenue soared 85% yoy driven mostly by the higher Tanzania project billing. On the IT business (recognised under other revenue), Serba has secured 3 software development contracts (2 in Qatar, 1 in India), ranging from 6–12 months period. This segment saw a huge jump in revenue at RM40m, on track to achieving its RM150m internal target in FY19. We also find comfort that while revenue continued to grow, the group’s margin remained stable, up 0.8ppts yoy to 17.8%. Net gearing increased from 0.55x to 0.65x with the recent sukuk insurance, still manageable in our view. The revenue split between O&M and EPCC revenue in 6M19 was at 85%/15% compared to 90%/10% in 6M18.

Update on Projects

The Tanzania chlor-alkali project saw a higher revenue recognition amounting to RM38m (vs RM2m in 1Q19). The contribution from the US$66m Laos hydropower plant project continued to be minimal (RM3m) due to the seasonal monsoon season in 2Q/3Q and will likely only see a pick-up from 4Q19 onwards. Meanwhile, Kuwait benefited from a total of RM13m in call-out work during the quarter, having seen no call-out work since 2Q18. Serba is in the midst of negotiating for the renewal of a couple of contracts in Oman (individual contract value ranging from US$50–80m), which will be a positive if secured. Activities in Malaysia are expected to remain robust supported by high Bintulu maintenance needs.

Reaffirming BUY and 12-month Target Price of RM5.50

We reaffirm our bullish stance on Serba’s earnings growth backed by its latest outstanding order book of RM9bn (O&M portion at RM6bn and EPCC at RM3bn), on track to achieving its RM10bn target by end-2019. We maintain our BUY call and target price of RM5.50, pegged to 14x FY20E PER.

Source: Affin Hwang Research - 23 Aug 2019