9M17 results came above expectations on the back of stronger-than-expected margins. Hence, we upgrade our FY17-18E earnings by 6%. We continue to like SERBADK for: (i) decent earnings growth of 22-10% in FY17-18 backed by both O&M and EPCC segments, (ii) stable margins of 11.7-11.2%, and (iii) superior ROE of 21-20%. Thus, we reiterate OP call on the stock with higher TP of RM2.95/share peg to 12x FY18E PER.

Above expectations. SERBADK registered 9M17 core net profit (CNP) of RM229.5m, accounting for 81%/80% of our/consensus full-year estimates. This came above expectations due to stronger-thanexpected margins. A 3rd interim dividend of 1.5 sen/share is proposed, bringing YTD DPS to 5.2 sen which also beat our expectation of 6.3 sen.

3Q17 earnings down QoQ but up YoY. 3Q17 earnings decreased by 18% QoQ to RM68.0m mainly due to weaker contribution from EPCC segment (-33%) as a result of delay in construction work of three small hydropower plants in Kota Marudu due to bad weather as well as higher tax expense (+2.5x). We are guided that additional RM30.0m tax expense to be claimed by the tax authority for the assessment period of 2010-2015 would lift its effective tax rate higher in the next few quarters.

YoY, SERBADK’s net earnings improved by 52% from RM44.9m in 3Q16 in tandem with 28% growth in top-line thanks to stronger contribution from both O&M (+10%) and EPCC (+73%) segments masking higher tax expense (+6.1x). Note that the Qatar operation is not affected by the diplomatic crisis and continued to achieve higher revenue contribution (+30% QoQ; +63% YoY) backed by new contracts and ad-hoc work orders from existing clients.

PeIP construction to start by 1Q18. Pursuant to its Pengerang development plan in August this year, SERBADK announced that Top Luxury Sdn Bhd, its wholly-owned subsidiary, has been awarded a contract to undertake the construction works for the Pengerang ecoIndustrial Park (PeIP) which include, amongst others, 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 1QCY18 and will take approximately two years to complete with a contract value of c.RM400m.

Upgraded our FY17-18E earnings estimates by 6% to RM300.3m and RM329.7m, respectively, assuming higher FY17-18E gross margins to 17.5%-17% for O&M segment (from 17.0%-16.5% previously) and 17% for EPCC segment (from 16%).

Reiterate OUTPERFORM call. Following our earnings upgrade, we maintain OUTPERFORM call on the counter with higher TP of RM2.95 (from RM2.75 previously) pegged to an unchanged 12.0x FY18E PER. We continue to like SERBADK for: (i) its decent earnings growth of 22- 10% in FY17-18 backed by both O&M and EPCC segments via geographical expansion, (ii) stable margins of 11.7-11.2%, and (iii) superior ROE of 21-20%. Risks include: (i) lower-than-expected order book replenishment, (ii) failure to execute power plants, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 22 Nov 2017