We are positive on its new eight contract wins worth a total of RM496m as it demonstrates SERBADK’s ability to secure new jobs continuously from existing and new clients. No change to our estimates as it is well within our order-book replenishment assumption. All in, we keep our OUTPERFORM call on the stock with a higher TP of RM3.65/share pegged to 15.0x FY18E PER.

Secured RM385m contracts from GLSB. Yesterday, SERBADK announced that the company has secured three EPCC contracts and one O&M contract from Greenearth Landmark Sdn. Bhd. (GLSB) with a combined estimated contract value of approximately RM385m. These EPCC contracts include planning, designing, constructing, interior design works, landscaping, equipping, installing, testing and commissioning and completion of (i) the sewerage treatment plant (STP) on a 5549.7m2 land in Hartamas, (ii) 12-floor government building with a net lettable area of 140k sq ft and (iii) the New Upper Kerayong STP facility. The contracts are structured that the EPCC of government building will commence upon completion of STP and followed by the Kerayong STP subsequently, which would take up to 9 years to complete. However, we understand that the client is aiming to proceed with all three projects concurrently and complete them within the next three years, commencing from 2Q18. Meanwhile, the O&M contract for the STP will start from the date of issuance of the certificate of completion of the STP facility for tenure of 10 years.

Another four contract wins totalling RM111m. Additionally, SERBADK also secured another three new O&M contracts and one EPCC contract from various clients with a combined estimated value of RM111m and contract period of three years each (Refer to the table on next page for details). We are positive on these contracts win as it demonstrates SERBADK’s ability to secure jobs continuously from clients. Apart from the 3-year provision of rotating equipment maintenance job from Malaysia LNG Sdn Bhd whereby SERBADK was the incumbent, all the other 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).

No change to our FY17-18E earnings estimates. With the latest contract win of RM496m, this brings the YTD wins to RM2.0b, which achieved our order-book replenishment assumption of RM2.0b/annum. Thus, no change to our earnings estimates as we expect no further win for the year. Current order-book stays at RM5.3b, of which RM4.0b is attributable to O&M with the balance is EPCC related.

Reiterate OUTPERFORM call. We continue to like SERBADK for: (i) its decent earnings growth of 22-10% in FY17-18E 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%. All in, we maintain OUTPERFORM call on the counter with higher target price of RM3.65 (from RM2.95 previously) pegging to higher FY18E PER of 15.0x (from 12.0x previously). We believe SERBADK deserves a higher premium of 50% (from 25%) to its closest comparable peer, DELEUM due to: (i) 10x bigger market capitalisation, (ii) more diversified customer base, and (iii) doubling ROE. Such valuation also represents a narrower 30% discount (from 35%) to the average PER for the oil and gas universe (skewed by Petronas-related stocks with market cap of >RM20b) given its continuous outperformance of its quarterly results.

Risks include: (i) lower-than-expected order book replenishment, (ii) failure to execute power plants, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 30 Nov 2017