Serba’s 2019 results were in line with expectations. Revenue and core net profit grew by 38% and 28% yoy, with Qatar and Malaysia being the two strongest growth regions followed by UAE. O&M and EPCC segmental revenues were up 33% and 47%, respectively. We raise our EPS forecasts by 2% on tax changes, raise our 12-month target price to RM2.85 and reiterate our BUY rating.

Qatar and Malaysia Made Up 56% of 2019 Revenue (from 49% in 2018)

Serba continued to benefit from the higher Qatar work flows (servicing around 15 contracts) in 2019 post sanctions being imposed on UAE and Saudi companies since 2018, which saw revenue within the region grow by 83% yoy. Malaysia also gained good traction recording a revenue growth of 40% on the back of higher Master Servicing Agreement work materializing. With the Bintulu Integrated Energy Service Hub (BIEH) completing in 1Q20, Serba expects more O&M and EPCC work opportunities from Malaysia. Net gearing has grown from 0.45x at end-18 to 0.84x, in tandem with the 33% growth in its orderbook.

4Q Results Highlights

Serba reported its strongest quarterly revenue and profit of RM1.4bn and RM141m on the back of seasonal robust Middle East activities. Finance cost notably increased from RM31m in 3Q19 to RM110m due to early repayment of RM sukuk issued in 2018 using a new syndicated financing, which resulted in a one-off fee of RM52m (normalized should be RM58m). Associate profit also jumped from RM9m to RM21m qoq; we gather that CSE Global profits improved by RM3m while KAJV performed a oneoff retroffiting job for Syarikat Air Terengganu (SATU) amounting to RM10m. Moving forward, Serba will also benefit from a lower effective tax rate moving forward (back to 9% from 11% guided back in 2018) due to a change in Labuan tax guidance. As a result, Serba recorded a RM1m tax credit, reversing out the earlier provisions.

Maintain BUY With RM2.80 Target Price

We raise our EPS forecasts by 2% to reflect the lower effective tax rate (from 11% to 9%) moving forward. Serba’s current orderbook stands at RM10.7bn (60:40 split between O&M and EPCC). We believe tender prospects of RM16.5bn will gradually materialize, and achieve management’s internal target of RM15bn. We maintain our BUY call with a higher target price of RM2.85 (from RM2.80), pegged to an unchanged 14x 2020E PER.

Source: Affin Hwang Research - 27 Feb 2020