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Lessons from the saga of Serba Dinamik kcchongnz

kcchongnz
Publish date: Fri, 20 May 2022, 07:22 PM
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Note: I wrote this article from a rear-view mirror as I have never paid any attention to Serba Dinamik before the events. I did carry out some punting with small money for fun and loss after its first suspension in May 2021. I also done some “investment” on it sister companies, SCIB and K Power in 2020 and 2021 and thank God, made good money, in hindsight, out of luck. That is another story.

Serba Dinamik (Serba) was a high-flying oil and gas powerhouse listed in Bursa. Its service includes operation and maintenance services, engineering, procurement, construction, and commissioning etc. for oil and gas companies, most of them from the Middle East, and provision of IT solutions.

One specialty of Serba is that it seemed to be able to secure multi-billion jobs with exceptional high margin from the Middle East which made up the bulk of its revenue and profits.

What made Serba so special?

A Darling stock in Bursa

Serba was listed at the beginning of year 2017 at an adjusted price of about 75 sen as shown in Figure 1 below, when the oil and gas industry was still in doldrum. Despite that, its share price rose, and continued to rise unabated to a peak of RM2.42 at the beginning of year 2020, only hindered by the Covid-19 pandemic. It was the best IPO in 2017. It became the darling stock in Bursa everyone knew and well sought after, including institutional investors.

The rise of the share price of Serba was due to its high growth in revenue at a compounded annual growth rate of 44% in the last 5 years from RM1.41 billion in 2016 to RM8.61 billion in 2021. Net income grew in tandem at a CAGR of 38% from RM151.4 million to RM758.4 million.

There was a caveat though. In the last 5 years, although net profit increased by close to 20 folds, the business had been sucking cash, to the tune of RM3.8 billion.

There was no bound to the to its future prosperity.

But here came the spoiler.

 

Audit issue

At the beginning of year 2021, Serba changed its financial year ending 31 December 2020 to 30 June 2021. That had already sounded an alarm bell, that the annual report of 2020 was not forthcoming when it was due, and the company took the path of extending its financial year to 6 months later. In May 2021, the external auditor of Serba, KPMG had raised concerns about not being able to verify contracts and transactions worth 3.5 billion ringgit with 11 of Serba's customers.

The trading of shares of Serba was suspended at the end of May 2021, when it was last traded at RM1.61. It resumed trading a few days later, with double limit down on its share price.

Serba filed a lawsuit against KPMG. This led to the resignation of the external auditor in June 2021. Subsequently a new external auditor, NEXIA SSY PLT was appointed.

Even with the new external auditor, Serba was unable to furnish its audited report for the extended financial year ending 30 June 2021 on time. That again led to the suspension of trading of the stocks in October 2021 when it was last traded at 37 sen, and further extension of the suspension as the audited account was not forthcoming. Only until recently, the annual report and audited account, with some qualifications from the new external auditor, was submitted to Bursa.

The annual report reversed from a net profit of RM758 million in the unaudited account to a loss of RM185 million with the audited account. What a big difference? Weren’t there financial shenanigans?

In July 2021, Serba appointed EY Consulting as a special independent reviewer on Bursa's directive to review the issues raised by KPMG. Three months later, it filed a lawsuit against EY Consulting, seeking to restrain the audit firm from releasing any findings or report on the group.

This came after the company filed a separate suit against stock exchange Bursa Malaysia on Nov. 3, contending that Bursa acted "in excess of power" by instructing Serba to announce findings from an independent review by EY Consulting.

Subsequently, in retaliation, the Malaysia's securities regulator said it was seeking the arrest of Serba Dinamik Holdings' chief executive and charged company officers with submitting a false statement to the country's stock exchange. The case was recently settled with a compound fine of RM3 million for each director involved, instead of pursuing the maximum penalty which includes imprisonment of up to 10 years.

With the settlement of the court case with compound fines, which stunt many, that the fraud was so huge with so many investors lost so much money but the guilty were let off the hooks with compound fines, Serba shares was allowed to be traded again.

 

On Tuesday 10 May 2022 when Serba was allowed to trade again, its share price plunged 60% from the suspension price of 37 sen to 15 sen. The next day, it tanked by another 60% again to 6 sen before recovered to close at 14.5 sen on Friday 19 May 2022.

Compared to its adjusted listed price of about 75 sen, and the peak price of RM2.42 just before Covid-19 pandemic, there has been a huge value destroying for the shareholders of Serba.

What happened?

There are plenty of lessons to be learned from the Serba Dinamik saga. There are lessons for speculators as well as investors.

We may go through one by one next.

 

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