In the previous blog, one of the member had doubt of what P/E we should be using to calculate its stock price on EPS. SERBADK is in a very specialized market which almost 80%-90% of its revenue came from O&M services, where MRO contributed almost 90% to O&M's revenue and the rest are from IRM. Other than O&M, SERBADK also involved in EPCC and other products and services.

There are many Oil and Gas companies listed in Bursa Stock Market which the P/E range from 6x to 20x, it is very difficult to determine how much P/E should be used in calculating its stock price value.

Since SERBADK major revenue was from MRO and IRM, let's look at which companies in Malaysia are providing the same service locally and/or internally, be it listed in the Bursa or not.

Refer to the IPO prospectus, Vital Factor Consulting Sdn Bhd carried out an independent industry of asset assessment for O&G and power generation. The consultant company listed out SERBADK's international (head office outside ot Malaysia) and local (head office in Malaysia) peers. Although it was not an exhaustive list, but it did listed out almost all local companies in Malaysia.

Since different countries has different P/E in different industries (e.g. P/E for consumer products in USA may not be the same with Malaysia), thus I only choose those local companies in the same industry (MRO and IRM) to compare with SERBADK. Let's look the the table below:

SERBADK ranked 3rd among the MRO players in Malaysia. Its peers' P/E were between 12-70. SERBADK had the lowest P/E at 8.32 and recorded the highest EPS and ROE in T4Q! Most of the research report set it's P/E at 11x to 12x maybe because it is still consider a new stock listed in Bursa. With consistant result in the future and good management team (their senior management team has 10-30 years experience in O&G industry), I believe its P/E could be at least 12x-15x in 2 to 3 years time.

By using the rationale above, we may come up with the calculation as below

With the business expansion in Africa without compromising the business in Middle East, it is very likely the revenue from Africa could flow in by early 2018. The expected revenue contritbution from Africa range from RM 585m to RM 830m, which is 18% to 25% of the existing FY18 forecast revenue. the conservative estimated earnings will be increased by 16% to 23%, taking account higher corporate tax rates in Africa. At present SERBADK has submitted bids totalling RM 2b across IvoryCoast and Tanzania, through both O&M and EPCC divisions.

It also planned to develop small gas power station and water utilities in Indonesia with EPCC (70 mil from the IPO proceeds will be utilized for this purpose) and sapu sekali the O&M services in these projects. The construction may start in early 2018 and may complete in 2020 to generate more revenue.

It might be too optimistic to expect SERBADK to generate 27 EPS by 2020. Nevertheless, if the Africa expansion is able to generate 5-10% EPS annual growth, together with the EPCC expansion in coming years, I believe to achieve 24-25 EPS by 2020 is possible. With P/E 12-13, the TP by 2020 could be around RM 3.20 to RM 3.50, which is close to 20% capital growth on top of 3%-5% dividend yield per year. Still sounds good to me.

With current price of RM1.91 (as of 13/08/17), I believe it is undervalue and is a solid stock to keep for long term IF SERBADK is able to succeed in Africa and execute its plans as per IPO prospectus below.

*Disclaimer: The information above is only for sharing purpose, it does not contain sell or buy call. Trade at your own risk.