Serba has proposed a 3-for-2 share split, 2-for-5 bonus issue together with free warrants on the basis of 2 warrants for every 5 subdivided shares. Effectively, Serba’s share base would doubled, excluding warrant conversion. We are positive on this as it will enhance the liquidity of the shares and the new warrants act as a sweetener. We maintain our BUY target price of RM5.50. Serba is one of our top O&G sector and country picks.

Share Split and Bonus Issue

Serba announced a share split of every 2 shares into 3 subdivided shares, and the issuance of 881.1m bonus shares on the basis of 2 bonus shares for every 5 subdivided share. This will double Serba’s current share base from 1.47bn to 3.1bn shares, which will help to enhance the current liquidity of the stock.

Free Warrants as Sweetener

Serba will also issue 881.1m free warrants on the basis of 2 warrants for every 5 subdivided shares. Assuming an illustrative exercise price of RM2.56, the warrant would raise gross proceeds of RM2.26bn, which will be utilized for working capital purposes as well as repayment of bank borrowings. The warrants carry 5-year tenure. Effectively, shareholders would receive 2.1 new bonus/split shares and 0.6 free warrants for every existing shares held.

Maintaining Our BUY Call

We retain our FY20-21E EPS pending the completion of the share split and bonus issue by 4Q19. We remain positive on Serba’s business outlook on the back of robust maintenance demand from the domestic and international markets. The ramp up of EPCC contract progress will also help drive the earnings growth of the group. The group’s order book remains sizeable at RM9bn (O&M at RM6bn, EPCC at RM3bn) on track to achieving its RM10bn target by end-19. We maintain our BUY call and 12- month target price of RM5.50, based on 14x 2020E EPS. Key downside risks: 1) unforeseen delays in the client maintenance schedule, ii) hiccup in EPCC progress, and 3) margin deterioration.

Source: Affin Hwang Research - 3 Sept 2019