• 3Q20 net profit was in line with our and consensus expectations, comprising 77% and 74% of respective full-year estimates
• O&M profit continues to show growth, offsetting a slowdown in existing EPCC work. ICT is evidently becoming a key business driver, as total profit contribution increased to 14% in 3Q20 (from a mere 2% in 3Q19)
• Reiterate BUY rating and target price of RM2.15

Cumulative net profit grew 21% yoy

Serba Dinamik reported a stellar 3Q20 42% yoy revenue increase with the key growth driver mainly being the O&M segment (+34% yoy). ICT, which made up only 1% of total revenue in 3Q19, has grown to 10% currently. In terms of profitability, ICT now makes up 14% of PBT vs 2% in 3Q19. Qatar and Malaysia’s combined contribution remained steady at 54%. UAE contribution to overall revenue has dipped to 15% (3Q19: 24%; 2Q20: 29%) due to lower call-out orders impacted by COVID. Bahrain contribution has increased to 13% (3Q19: 8%; 2Q20: 5%) on a higher number of servicing contracts. Albeit small, Kuwait reported its highest quarterly revenue at RM34m, close to triple that in 6M20 at RM13m as it saw higher frequency of maintenance needs.

Cash flow deteriorated over high inventory stocking up and receivables

Operating cash flow fell 42% yoy mainly due to higher receivables and inventory stockup in 2Q20 on concerns over supply chain disruption during this pandemic period. Serba has in the past maintained RM0.9m-1.1bn of inventories, but this has increased to an average RM1.4bn in recent quarters. Net gearing increased slightly to 0.89x (from 0.76x).

EPCC project update

Two of Serba’s EPCC projects are due for completion in 2021– the Turkmenistan SCADA project and Tanzania chlor-alkali plant (both in Sept-21). Serba is in the midst of mobilizing its project team over to Turkmenistan to start with installation and system integration work. Overall progress is on track. No new updates on the Tanzania project (now 51% completed), but management guided that the project is still on track.

Reiterate Buy

We maintain our target price of RM2.15, based on 12x FY21E EPS and reiterate our Buy call. We continue to like Serba for its earnings-resilient business in the maintenance space, and good track record in securing contracts amid a low oil price environment. Bid book remains unchanged at RM20bn. Our 2021E earnings are below consensus as we have conservatively factored in delays in certain EPCC projects. Key risks include unforeseen delays in clients’ maintenance schedules and existing EPCC progress, and cost overruns.

Source: Affin Hwang Research - 24 Nov 2020