Serba Dinamik (Serba) remains our high-conviction sector top pick. 2020 is set to be the most interesting year since its listing with aggressive order book growth targets set by management. We believe Malaysia will play a bigger role in its growth this year, particularly Sar awak (in tandem with upcoming state elections), and higher maintenance orders from Petronas’ related plants. We raise our FY20-21E EPS by 8-13% and our TP to RM2.80; reaffirm Buy rating.

RM15bn Orderbook Target by End 2020

Dato Karim has set his eyes on an orderbook target of RM15bn (+50% growth) by end 2020. We believe the key growth drivers would likely be from Malaysia, and particularly from the state of Sarawak. The Bintulu Integrated Energy Service Hub (BIEH), which is expected to commence operations by 1Q20, would double Serba’s existing maintenance and EPCC capacity. In addition, we believe O&M activities could see a demand spike – from the Pengerang RAPID plant and more work conversion from the Master Service Agreement awarded by Petronas in October 2019.

EPCC Projects Progressing Well

Its construction projects in Terengganu and Tanzania (combined constitutes 10% of its EPCC orderbook) are scheduled to be completed by 2Q20 (total estimated outstanding value: RM350m). Both have achieved 40% completion, which appears a bit behind schedule. We gather that the Tanzania project should be able to be delivered as planned, as most of the remaining work is related to equipment installation which has already been delivered on site. However, Terengganu might face a slight delay. Meanwhile, the Uzbekistan chlorine processing plant and Turkmenistan supplementary equipment and automation (SCADA) gas pipeline projects, which make up almost half of the order book (estimated value: RM1.7bn), are the key revenue drivers for the EPCC segment. Both projects are at their early stages of work and on track for completion by 2021.

Maintain BUY; Raising Target Price to RM2.80

We reiterate our BUY rating and raise our target price to RM2.80 (from RM2.62), pegged to unchanged 14x PER post our EPS upgrade. We believe that there is still room for further earnings upgrades, despite our revision as we have yet to fully factor in management’s high order book target. Key downside risks include: 1) unforeseen delays in the client maintenance schedule, 2) non-renewal of O&M contracts and 3) margin deterioration.

Source: Affin Hwang Research - 10 Feb 2020