• 2020 core profit (+23% yoy) tracked ahead of our/consensus estimates by 10% and 7% respectively
• Despite the pandemic, O&M business managed to sustain growth at 30% yoy, similar to 2019. Brightest star was the ICT business, growing from 4% of its PBT in 2019 to 10% in 2020, which helped to cushion the delay in most of the EPCC project progress
• Raising our 2021 EPS forecast by 7%; trimming our TP to RM2.10 after taking into account the enlarged share base dilution and lowering PER multiple

Results Exceeded Expectations

4Q20 revenue rose 33% yoy as both its O&M and EPCC segments grew by 29% and 41% respectively. Malaysia revenue to total contribution was higher at 38% (compared to the normal run rate of 30%) as Serba saw higher maintenance work orders roll out from local oil majors post the MCO. This brought down its EBITDA margin by 1.7ppts as Malaysian activities garnered lower margins vs international contracts. In the Middle East, Qatar saw a rather flattish revenue as compared to 4Q19 (falling from 31% to 26% of total revenue), which was cushioned by Oman (7% of total revenue) which started gaining traction since early part of 2020 (currently servicing 4-5 contracts vs 2-3 in 2Q20).

ICT Helped to Cushion EPCC Delays

After stripping out the RM20m one-off gain from its 3Q sukuk buyback, 2020 core net profit grew 23% yoy to RM612m, on the back of a 33% revenue growth. Middle East revenue contribution as a whole continued to sustain at 64%, while Malaysia inched up to 31% (2019: 29%). The ICT business was Serba’s saving grace in 2020, making up 10% of PBT (vs. 4% in 2019), which helped offset the slow EPCC progress, partly impacted by global travel restriction bans. Serba also managed to grow its order book size by 87% to RM18.7bn (end-19: RM10bn) with the group having to raise a total gross amount of RM965m via 2 rounds of private placement in Apr-20 and Jan-21, respectively to fund the growth.

Reiterate Buy

We raise our 2021E EPS by 7% to reflect higher O&M work orders but lower our TP slightly to RM2.10 (from RM2.15) as we factor in the enlarged share base from its recent placement exercise. We also lower our PER multiple to 11x (from 12x) to reflect the heightened EPCC execution risk we see in 2021. Maintain Buy. Key risks include unforeseen delays in clients’ maintenance schedules and existing EPCC progress, and cost overruns.

Source: Affin Hwang Research - 1 Mar 2021