Despite already appreciated 47% since IPO, SERBADK, an experienced O&M services specialist, is still trading at undemanding valuation of 9.6x FY18E PER, in our view as we see further upside. This is premised on: (i) its decent earnings growth of 15-10% in FY17-18E backed by both O&M and EPCC segments via geographical expansion amidst weak oil prices, (ii) stable margins of 10.6-11.1%, and (iii) superior ROEs of 20-19%. The RM1.4b development project in Pengerang could position SERBADK as a leader in the maintenance services segment capitalising on the increasing demand from PIC in the long run. We initiate coverage on SERBADK with OUTPERFORM call at TP of RM2.75.

Experienced O&M services specialist focused on growing regional presence. 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. Having established itself as a solid domestic MRO service provider, SERBADK is focused on growing its regional presence, actively bidding for projects of up to RM10b (70:30 split for O&M:EPCC) to add on to an already promising order-book of RM4.7b (87% attributable to O&M where historically 80% are renewed).

Qatar operations remained status quo. The Qatar concerns have been plaguing SERBADK’s share price as Qatar contributed 19% of 1H17 revenue and 18% of its RM4b order-book. We understand that currently all the businesses are still on-going but scaling back on bidding efforts. The current situation remains uncertain at this juncture pending a firm solution, but strategists expect a peaceful negotiation given its strategic importance as an LNG exporter. In a worst-case scenario, stripping out related contracts from the order-book would cut FY18E-19E earnings by 15-12%.

Grounding in Pengerang. Following the venture into asset-ownership business model via the acquisition of: (i) a CNG plant in Muaro Jambi, and (ii) 30% stake in three hydropower plants in Sabah, SERBADK recently announced its RM1.4b development project in Pengerang which comprises PeIP, PICC and PNR. We believe the Phase 1 development of PeIP will allow SERBADK to capitalise on the maintenance opportunities arising from RAPID, which is slated to commence in 2019. We have yet to account for any potential earnings from the development project in Pengerang except for the EPCC portion of PNR to be awarded by its 30%-owned associate.

Estimating earnings growth of 15-10% for FY17-18E led by consistent top-line growth of 18-15%, underpinned by gradual recognition from existing projects and 20% success rate from tenders (RM2.0b order-book replenishment per annum). 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. A dividend pay-out policy of at least 30% potentially translates to FY17-18E DPS of 6.3-6.9 sen, giving a dividend yield of 2.8-3.1%.

OUTPERFORM call with 25% upside. There are no directly comparable listed peers but Deleum (Not-Rated) is a much smaller domestic-centric player with less diversified customer base comes close. Pegging to 12.0x FY18E PER which is at 25% premium to Deleum for its 8x bigger market capitalisation, 2x profit margins and better ROE or a 35% discount to the average PER for our oil and gas universe (skewed by Petronas-related stocks with market cap of >RM20b), we arrive at a target price of RM2.75. Note that the total Pengerang project will give additional RM0.11/share to our TP applying 20% discount to its RNAV. Risks includes: (i) lower-than-expected order book replenishment, (ii) unable to execute power plants, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 19 Sept 2017