We are positive on the proposed 10% placement, in which bulk of the proceeds will be used to develop Pengerang project and EPCC contract in Tanzania. This allows SERBADK to have the financial flexibility to expand its core businesses. Thus, upgrade FY18E earnings by 14% on higher order-book assumption. All in, keep OP call on the stock with fully diluted TP of RM3.80/share, from RM3.65 previously, pegging to 15.0x FY18E PER.

10% private placement. Yesterday, SERBADK proposed to issue up to 135.0m new ordinary shares, representing c.10% of its existing share at an issue price to be determined later. Note that the private placement does not require further approval given that the general mandate was approved at the previous AGM convened on 26th May 2017. The placement may be implemented in one or more tranches and is expected to be completed by 1Q18.

To fund Pengerang and Tanzania project. Assuming the placement shares are issued at indicative share price of RM3.25, SERBADK could raise RM433.9m from the exercise. Bulk of the proceeds of RM270.5m or 62% will be used for the partial development of Pengerang ecoIndustrial Park (PeIP). The remaining proceeds will be utilised for the partial development of Pengerang International Commercial Centre (PICC) and working capital requirement for the EPCC contract relating to the Tanzania project at 10% and 26%, respectively. We are positive on the exercise as it improves the liquidity and financial position of the company. More importantly, this allows SERBADK to have the financial flexibility to expand both its O&M and EPCC businesses which require relatively higher working capital.

PeIP construction to start by 1Q18. Recall the Pengerang development plan announced in August last year; SERBADK’s whollyowned subsidiary, Top Luxury Sdn Bhd, has been awarded to undertake the construction work for the 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 1Q18 and will take approximately two years to complete with a contract value of c.RM400m. As for PICC, SERBADK is in the midst of identifying the suitable partner to jointly develop the project. We believe the project would probably commence the soonest by 2H18.

Upgrade FY18E earnings by 14.0% to RM375.8m assuming higher FY18E order-book assumption of RM3.0b (from RM2.0b previously) premising on the tender-book of >RM10b. Current order-book stays at RM5.3b, of which RM4.0b attributable to O&M with the balance EPCC related. Post earnings upgrade and adjustment for private placement, FY18E net gearing is lowered slightly to 0.05x from 0.13x previously.

Reiterate OUTPERFORM call with fully diluted TP of RM3.80 (from RM3.65) post earnings upgrade. Our fully-diluted TP is based on enlarged share base of 1.485b shares, pegged to unchanged FY18E PER of 15.0x. We continue to like SERBADK for: (i) its decent earnings growth of 22-25% in FY17-18E backed by both O&M and EPCC segments via geographical expansion, (ii) stable margins of 11.7-11.4%, and (iii) superior ROE of 21-18%. Risks include: (i) lower-than-expected order book replenishment, (ii) failure to execute power plants, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 10 Jan 2018