We are positive on the proposed JV in Tanzania, Africa as it is in line with SERBADK’s asset ownership strategy to generate recurring income while also marking its maiden footprint into Africa. Meanwhile, it also complements its core businesses by securing the USD70m EPCC and 10+5 years O&M contract. With no changes in our estimates, we keep our OUTPERFORM call on the stock with the TP of RM2.75/share.

JV agreement to establish plant at Tanzania. Yesterday, SERBADK announced that it has, on 6 October 2017, entered into a joint venture agreement with Junaco (T) Limited (JTL) for the establishment and operation of a 45 mt/day chlorine skid mounted chlor-alkali plant in Msufini Area, Mlandizi Ward, Kibaha District Coast Region in Tanzania. With that, a new special purpose vehicle with 75% equity stake owned by JTL while the remaining owned by SERBADK will be established and an industrial land of approximately 15,787 m2 has been identified in the abovementioned area. Moving forward, a definitive agreements will be laid out including details such as the shareholders’ agreement, EPCC, O&M contracts and etc. The transaction is slated to be completed by 1Q18.

Entitled to bag EPCC and O&M work. We are positive on such JV as it is in line with SERBADK’s asset ownership strategy to generate recurring income. The plant will produce caustic soda, chlorine, hydrogen and other derivatives through the electrolysis of raw salt as feedstock. We understand that the total project cost is estimated at USD73m, including land and construction cost. At 90:10 debt equity financing pending final confirmation, SERBADK is likely to inject USD1.8m (c.RM7.7m) for its 25% equity stake. Note that JTL is a leading water related solutions supplier and involved in importation and installation of fire fighting equipment. It will be in charge of plant operations, securing off takers and relevant regulatory approval as well as providing land. Meanwhile, SERBADK will be awarded the EPCC contract of USD69.8m (c.RM295.3m) as well as the 10+5 years O&M contracts. While the O&M contract has yet to be finalised, we reckon that the contract could be valued at the range of RM6m-15m/annum assuming 2%-5% of the construction cost.

No changes to our FY17-18 earnings estimates. Given the transaction will only complete by 1Q18 and the EPCC contract will be officially awarded by then and subsequently commence in 2Q18, we make no changes to our FY17-18 earnings estimates as it is deemed within our order-book replenishment assumption of RM2.0b/annum. Based on our ballpark estimates, we project the JV to generate USD3.0m (c.RM12.6m) PAT assuming 25% utilisation, ASP of USD3,500/mt/day in FY20 in which RM3.2m (1% of FY18 earnings) is attributable to SERBADK on its 25% stake.

Reiterate OUTPERFORM call. We still like SERBADK for: (i) its decent earnings growth of 15-10% in FY17-18 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 ROE of 20-19%. All in, we maintain our OUTPERFORM call on the counter with an unchanged target price of RM2.75 pegged to 12.0x FY18E PER. Note that the total Pengerang project will give an additional RM0.11/share to our TP applying 20% discount to its RNAV. Risks include (i) lower-thanexpected order book replenishment, (ii) unable to execute power plants, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 10 Oct 2017