FY17 results came within expectations, registering 26% YoY growth thanks to stronger contribution from both EPCC and O&M segments. With the entire prior years’ tax expenses being recognised in FY17, we lift our FY18E earnings by 2% on lower ETR and thus, TP was also upped to RM3.90 (from RM3.80) pegged to 15x FY18E PER. Still an OP for its decent earnings delivery and better contract flows.

Within expectations. FY17 core net profit (CNP) of RM310.0m came within expectations at 103%/100% of our/consensus full-year estimates. A 4th interim dividend of 1.6 sen/share was proposed, bringing its full-year adjusted DPS (post 10% private placement) to 6.3 sen at 30% payout ratio, as expected.

4Q17 earnings up QoQ but down YoY. 4Q17 earnings increased by 18% QoQ to RM80.5m mainly due to better EPCC (+52%; higher activities in UAE led by improved weather conditions) and O&M segments (23%; pick up in Middle East activities and higher call out in Malaysia), masking higher tax expense (+42%). Note that SERBADK has received the additional RM45.0m tax expense to be claimed by the tax authority for the assessment period of 2010-2015, which have been recognised in 3Q17 and 4Q17 at RM20m and RM25m, respectively. YoY, SERBADK’s net earnings dropped by 17% from RM96.6m in 4Q16 dragged by high tax expenses (+2.7x; additional RM25m tax expense from prior years) offsetting stronger contribution from both O&M (+7%) and EPCC (+20%) segments. Cumulatively, FY17 CNP improved by 26% YoY in tandem with 25% stronger top-line.

Upgraded our FY18E earnings estimates by 2% to RM381.5m

assuming lower effective tax rates to 7.5% from 9% as the entire prior year tax claims had been recognised in FY17. Meanwhile, FY19E NP of RM429.3m (+13% YoY) growth is introduced assuming RM3.0b orderbook replenishments.

Reiterate OUTPERFORM call. Order-book remains robust at RM6.0b (RM4b O&M & RM2b EPCC), providing 2-year earnings visibility. Following our earnings upgrade, we maintain OUTPERFORM call on the counter with higher TP of RM3.90 (from RM3.80 previously) pegged to an unchanged 15.0x FY18E PER. We continue to like SERBADK for: (i) its decent earnings growth of 23-13% in FY18-19 backed by both O&M and EPCC segments via geographical expansion, (ii) stable margins of 11.5-11.0%, and (iii) superior ROE of 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 - 27 Feb 2018