We are positive on the acquisition as it is line with SERBADK’s strategy of diversifying into asset ownership business model whilst expanding core businesses. However, we make no changes to our earnings forecasts as the related contracts are well within our order-book assumptions. All in, keep OP call on the stock with unchanged TP of RM3.80/share, pegging to 15.0x FY18E PER.

Entered MOA to develop hydropower plants. Yesterday, SERBADK entered into a Memorandum of Agreement (MOA) with Maju for the acquisition of 40% equity stake held by Maju in Maju Renewable Energy Sdn Bhd, Maju RE (Talang) Sdn Bhd and Maju RE (Temenggor) Sdn Bhd (collectively referred to as Target Co) at a purchase consideration of RM24.9m. This implies RM1.0m/MV, which is slightly cheaper than its previous acquisition of Kota Marudu’s hydropower plants at RM1.2m/MW and it will be entirely funded from the IPO proceeds. Maju currently owns 70% of the Target Co. with the remaining 30% held by Perak Hydro Renewable Energy Corporation Sdn Bhd. The Target Co have been granted approval to develop three hydropower plants located within the Temenggor and Belum Forest Reserves in Perak with a total of 60MW generating capacity as well as already signed the Renewable Energy Power Purchase Agreements with Tenaga Nasional Berhad for 21 years effective December 2019.

RM782m EPCC & O&M contracts up for grab. We are positive on the acquisition as it is in line with its strategy of diversifying into asset ownership business model whilst expanding core businesses. Upon completion, SERBADK is likely to be awarded with the EPCC contract for the power plants on a turnkey basis which is valued at approximately RM560m. Furthermore, SERBADK will also undertake the related 21- year O&M contract up to RM222m assuming RM10.6m/annum based on the average cost of 2%/annum on the capex. The EPCC is expected to commence by early 3Q17 for 24 months. Meanwhile, we also understand that these hydropower plants could generate net earnings of RM7m/annum to SERBADK at net 40% stake (<2% of FY18E bottom-line) assuming (i) project IRR of 15%, (ii) 21-year contract period, and (iii) net margin of 12%.

10% private placement completed. Last week, SERBADK announced that the proposed 10% private placement is completed with RM427.2m gross proceeds raised, implying the transacted price of RM3.20/share. Recall that the proceeds will be used to fund the partial development of Pengerang eco-Industrial Park (PeIP), Pengerang International Commercial Centre (PICC) and working capital requirement for the EPCC contract relating to the Tanzania project.

Maintain FY17-18E earnings as this first contract win of RM782m accounted for 26% of our FY18 replenishment assumption of RM3.0b. Post win, it will enlarge its outstanding order-book by 15% to RM6.0b (RM4b O&M & RM2b EPCC).

Reiterate OUTPERFORM call with TP of RM3.80. Our fully-diluted TP is based on enlarged share base of 1.485b, pegging 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 - 6 Feb 2018