Serba Dinamik (Serba) announced its first batch of contract wins for the year, comprised of 6 overseas contracts worth RM321m and another 6 domestic jobs on a call-out basis (estimated at around RM620m). This brings ytd contract wins to RM940m and its latest orderbook to RM10.7bn (management’s internal target stands at RM15bn by end-2020). Maintain our BUY call and RM2.62 target price.

Overseas: Secured 4 O&M, 1 EPCC and 1 Product Supply Contracts

Most of the overseas contracts secured are from Indonesia with 1 from Oman. We gather most are existing customers and the only new customer is from PT Mirah Ganal Energi. Two of the contracts are short term in nature, targeted to be completed by 1H20, while the remaining 4 provide orderbook earnings visibility until 2022. Gross profit margins for these jobs are expected to be in the range of 12-15%.

Throwing Another 6 Malaysia Contracts in the Bag

We estimate that the aggregate contract values secured from Malaysia are in the range of RM620m. We believe the 4 plant turnaround packages for 3 years awarded by Petronas make up the bulk of the value at around RM500m. Serba also successfully secured 2 new clients: SapuraOMV and Samalaju Industrial Port Sdn Bhd. Gross profit margins are expect to be similar to the above Indonesia contracts at 12-15%.

One Step Closer to Management‘s RM15bn Internal Target by End 2020

Inclusive of these batches of contracts, Serba’s current outstanding orderbook stands at RM10.7bn. The operational and maintenance (O&M)/EPCC breakdown at 66%/34% (RM7.1bn/RM3.6bn) with 60%/40% overseas/domestic split. We remain positive on Serba’s ability to secure more contract wins in the coming days with its tenderbook now at RM16bn (O&M/EPCC: 60%/40%), with the Middle East its key market making up half of the tenderbook, 30% from Malaysia and the remainder from Central Asia.

Maintain BUY

We make no changes to our earnings forecasts as these contracts fall under our replenishment target for the year. We reaffirm our BUY rating and keep our 12-month target price unchanged at RM2.62, based on a 2020E PER of 14x. Key downside risks include: 1) unforeseen delays in the client maintenance schedule, 2) non-renewal of O&M contracts, 3) EPCC project delays, and 4) margin deterioration.

Source: Affin Hwang Research - 5 Feb 2020