We believe growth for this new IPO today, Serba Dinamik Holdings (SERBADK) will be driven by continuous expansion of its O&M services and EPCC segments in the overseas market, especially the Middle East. Furthermore, venturing into asset ownership business model will provide an opportunity for SERBADK to generate stable recurring income. All in, we derive a fair value of RM1.73 based on SoP valuation with an implied FY17E PER of 10.4x. Not-Rated.

Experienced O&M services specialist. SERBADK is an international energy services company providing engineering solutions to the O&G and power generation industries with operational facilities in Malaysia, Indonesia, UAE, Bahrain and the UK. The company provides O&M services mainly on maintenance, repair and overhaul (MRO) of rotating equipment, which includes gas and steam turbines, engines, motors, pumps, compressors and industrial fans; inspection, repair and maintenance (IRM) of static equipment and structures, including boilers and unfired pressure vessels, piping systems and structures, as well as maintenance of process control and instrumentation.

Rapid geographical expansion amidst weak oil prices. Despite the challenging environment within the O&G upstream segment in the past two years due to spending cut by oil majors, SERBADK managed to achieve commendable growth via several geographical expansions. We believe such growth is largely attributable to SERBADK’s strategy of offering services at competitive pricing in order to win market share from foreign players.

Venturing into asset ownership business model. SERBADK is currently the owner of a CNG plant in Muaro Jambi, Indonesia, which commenced operations in November last year. In July last year, SEBRADK entered a 10-year agreement to lease a 0.8MW gas power plant and its auxiliary equipment to an Indonesian engineering company starting from 1Q17. Moving forward, SERBADK will continue to develop more small gas power plants in Indonesia which we expect to generate c.1-3% of the top-line in FY17-18.

Projecting earnings growth of 23-11% for FY17-18E led by consistent top-line growth of 17-19% underpinned by both O&M services and EPCC segments. We believe a significant portion of the revenue is recurring in nature as the maintenance contract stands a good chance for renewal upon expiry should SERBADK provides quality services to clients. Meanwhile, income generated from newly owned assets will be the icing on the cake. A dividend pay-out policy of up to 30% potentially translates to FY17-18E DPS of 5.0-5.5 sen, giving a 3.3-3.7% yield based on the IPO price of RM1.50.

Not-Rated call with fair value of RM1.73. We derived a fair value of RM1.73 based on SoP valuation, ascribing different target PERs for various sub-segments. Our fair value has an implied FY17E PER of 10.4x, which is slightly higher than small-mid caps oil & gas stocks valuation of 7-9x due to: (i) relatively higher market cap, (ii) strong earnings growth, and (iii) better margins. Risks include: (i) lower-than-expected order-book replenishment, (ii) unable to execute power plants, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 8 Feb 2017