We are positive on the RM206m contract win as it demonstrates SERBADK’s ability to continuously secure jobs. Meanwhile, the new centre in Bintulu will serve as a platform to expand the business operations in Sabah, Sarawak and Labuan while construction of PeIP will position SERBADK to capture potential maintenance demand from Pengerang. With no changes in our estimates, we keep our OUTPERFORM call on the stock with unchanged TP of RM2.75/share.

Secured seven contracts with combined value of RM206m. Last Friday, SERBADK announced that the company has secured three O&M contracts and four EPCC contracts with a combined estimated value of RM206m with contract period ranging from 1 month to 10 years. (Refer the table below for details). We are positive as this demonstrates SERBADK’s ability to secure jobs continuously from clients. As the breakdown of the value for each contract is not disclosed, we believe that bulk is attributable to the two 10-year EPCC contracts. Apart from the 3-year provision of maintenance services for a mechanical and rotating equipment job from JX Nippon Oil & Gas Exploration (Malaysia) Limited where SERBADK is the incumbent, the other six contracts are new wins for the company. We reckon that these jobs are able to match its historical average GP margins (17% for O&M and 15% for EPCC).

Embark on construction of new centre in Bintulu. As stated in the prospectus, SERBADK also announced the kick-start of the construction of its new MRO and IRM centre on Plot P20, Kidurong Industrial Area Phase II, Tanjung Kindurong, Bintulu, Sarawak with estimated capex of RM200m for the next two years. SERBADK is looking to finance the capex of up to 70% with the remaining funded by IPO proceeds.

PeIP construction to start by 1Q18. Pursuant to its recently announced Pengerang development plan in August this year, SERBADK announced that Top Luxury Sdn Bhd, its wholly-owned subsidiary has been awarded the construction work for the Pengerang eco-Industrial Park (PeIP) which includes among other things, the establishment of Malaysia’s first maintenance, repair and overhaul (MRO) and inspection, repair and maintenance (IRM) Global Centre of Excellence. The construction work is likely to commence by 1Q18 and will take approximately two years to complete with a contract value of c.RM400m.

No changes to our FY17-18 earnings estimates. The latest contract win of RM206m brings the YTD win to RM1.5b, which is still well within our order-book replenishment assumption of RM2.0b/annum. Orderbook is likely to stay unchanged at RM4.7b, of which RM4.0b is attributable to O&M with the balance is EPCC-related.

Reiterate OUTPERFORM call. We like SERBADK for: (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%. All in, we maintain our OUTPERFORM call with an unchanged target price of RM2.75 pegging to 12.0x FY18E PER. Note that the total Pengerang project will give additional RM0.11/share to our TP applying 20% discount to its RNAV. Risks include: (i) lower-than-expected order book replenishment, (ii) inability to execute power plants, and (iii) weakerthan-expected margins.

Source: Kenanga Research - 2 Oct 2017