With half of the year still ahead of us, Serba has already exceeded its previous year-end order book target of RM15bn, and may potentially reach RM18-19bn based on prospective tenders. Though we cut 2021E EPS by 6% to factor in delays in various EPCC completions, and 2021-22 by 2-3%, we maintain our BUY rating with a lower target price of RM2.10 (from RM2.15).

Current Earnings More Than Suffice to Cushion TR’s Fixed Cost

We gathered that the recent Teluk Ramunia (TR) yard acquisition from Petronas has raised a few concerns. However, we believe Serba’s past track record of execution and its securing new contracts could help turn around the yard. In the near term, the additional cost arising from depreciation and interest expense, adding up to RM17m, is only a minimal 2.8% of 2021E EPS. As such, we believe it does not warrant any worries at this point, being cushioned by its strong P&L, and with contracts expected to materialize in the next 12-16 months, in our view.

Ongoing COVID Restriction Delays Construction Progress

The water treatment plant in Terengganu and the Tanzania chlor-alkali plant completions have been pushed back to May 2021 and September 2021 from the initial 2Q20 timeline. Both projects are currently 79% and 51% completed. Elsewhere, we have assumed that the Turkmenistan project completion is delayed until 2021 due to the ongoing travel restrictions, although management guided otherwise. This project has reached 20% completion, targeted for completion by September 2020, with mostly installation work being still outstanding. Finally, two of Serba’s largest EPCC projects in Abu Dhabi and Uzbekistan are still at the early design stage, on track to complete in 2024 and 2022.

Lower Our EPS by 2-6%, Maintain BUY With Minor Tweak in TP

We lower our 2020E EPS by 6% to factor in the the delay in water treatment, chlor-alkali plant and Turkemistan completions. As a result, our revised earnings forecast is 9% below consensus, but this has yet to include the recently secured Abu Dhabi EPCC contribution, which makes up 40% of its current order book. We lower our target price slightly to RM2.10 (from RM2.15 previously), pegged to unchanged 12x PER on FY21 EPS. Maintain BUY.

Source: Affin Hwang Research - 2 Jul 2020