We are positive on its recent seven contracts win, which confirm two contracts from Maju following its 40% equity stake acquisition to develop hydropower plants earlier. Meanwhile, the acquisition of KB Engineering will strengthen its O&M business by leveraging on its expertise in the coatings industry. All in, we keep our OUTPERFORM call on the stock with unchanged TP of RM3.80/share, pegged to 15.0x FY18E PER.

Confirming contracts win from Maju. Yesterday, SERBADK announced that it has secured two EPCC contracts and five O&M contracts with a combined estimated contract value of approximately RM830.9m. This includes one EPCC and one O&M contract from Maju Renewable Energy Sdn Bhd, Maju RE (Talang) Sdn Bhd & Maju RE (Temenggor) Sdn Bhd (collectively referred to as Maju) with an estimated contract value of RM560m and RM222m, respectively. Recall that SERBADK has earlier proposed to acquire 40% of Maju to develop three hydropower plants located within the Temenggor and Belum Forest Reserves in Perak with a total 60MW generating capacity. The EPCC will start in April 2018 for two years and the O&M contract will start subsequently for 21 years.

Another five contract wins totalling RM48.9m. In addition, SERBADK has also secured another four new O&M contracts and one EPCC contract from various clients. While the individual contract value breakdown is not disclosed, these five contracts could be worth RM48.9m collectively (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. We reckon that these jobs are able to match its historical average GP margins (17% for O&M and 15% for EPCC).

Small acquisition to strengthen its O&M. On a separate note, SERBADK announced a conditional share sale agreement to acquire 100% stake in KB Engineering for a cash consideration of RM2.0m (fully funded by IPO proceeds). The company is principally engaged in servicing and repairing of machinery and sale of spare parts. We understand that the acquisition will strengthen its O&M business by leveraging on the expertise of KB Engineering in the coatings industry despite the immaterial earnings contribution at this juncture. Note that the company recorded net losses of RM0.1m in FY16 with net asset of RM0.6m as of 31 Aug 2016.

Maintain FY17-18E earnings. We have imputed the two contracts win from Maju earlier on and the other five contracts totalling RM48.9m will bring its YTD win to RM839.9m. As it is still well within our FY18 replenishment assumption of RM3.0b (28%), we make no changes to our estimates and its order-book should stay at 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 shares, pegged to unchanged FY18E PER of 15.0x. We continue to like SERBADK for: (i) its decent earnings growth of 22-25% for 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 - 15 Feb 2018