Serba Dinamik’s (Serba) 1Q20 result were in line with expectations. Malaysia, Qatar and the UAE were the key regions driving growth this quarter. Both O&M and EPCC continued to register growth with margins remaining stable. We tweak our EPS forecasts to factor in the recent placement exercise. We reiterate our Hold call with a higher target price of RM1.80.

Malaysia, Qatar and UAE Drove Yoy Growth

1Q20 revenue grew 30% yoy and drove net profit higher to RM134m (+19% yoy). The revenue contribution from Qatar and the UAE expanded from 45% in 1Q19 to 50%, benefiting from a higher number of servicing contracts. Malaysia continued to make up 1/3 of total revenue, and saw 25% growth on the back of higher O&M and EPCC activities. We gather that maintenance activities have not seen any sign of a slowdown despite the recent crash in global oil prices.

EPCC:O&M:ICT Order Book Mix Now Stands at 51:40:9

The recently secured RM7.7bn Abu Dhabi project has boosted Serba’s order book to RM17bn, and changed the order book mix with heavier weightage towards EPCC instead of O&M previously. Aside from this, the Turkmenistan and Uzbekistan projects are its next two biggest EPCC contracts. Both projects have recognised <10% progress, are currently in the design stage and are expected to drive the bulk of its EPCC earnings until 2021. The chlor-alkali plant in Tanzania, targeted to be completed in 2Q20, is expected to see some delay due to the Covid-19 outbreak, but remains on track to be completed by end-2020. Most equipments have arrived on site, pending installation work. Likewise, the completion of the BIEH facility in Sarawak, targeted for completion in 1Q20, has been postponed to 2Q20 due to the restricted workforce movement during MCO.

Maintain Hold

We tweaked our EPS forecasts to reflect the enlarged share base of the concluded private placement. We have yet to factor in the Abu Dhabi earnings contribution into our model pending the finalisation of details (ie: project design, sub-con portion, etc). We roll forward our valuation and derive a new target price of RM1.80, on a higher target PE multiple of 10x (from 9x) that we believe is justified given the growth in order book and leaner balance sheet. This is within the PER range abscribed to mid-sized O&G peers at 10-12x. We maintain our Hold rating.

Key risks include: 1) delays in the client maintenance schedule, EPCC progress delay, and 2) cost overrun.

Source: Affin Hwang Research - 22 May 2020