We are positive on the 24.8% stake acquisition in CSE as it will expand SERBADK’s geographical footprint given CSE’s global presence in more than 20 countries. Post-acquisition, we adjusted our FY18-19E earnings by 1.4% while net gearing level remains healthy at 0.23x. All in, OP call maintained with higher TP of RM3.95/share, pegged to 15.0x FY18E PER.

Acquired 24.84% stake in CSE. Last Friday, SERBADK entered into eight separate conditional share sale and purchase agreements to acquire 24.84% stake in CSE Global Limited (CSE) for a total cash consideration of up to SGD57.7m (approximately RM170.6m) or SGD0.45/share from existing shareholders. CSE is a Singapore Stock Exchange-listed company involved in the provision and installation of control systems as well as turnkey telecommunication network and security solutions.

Expanding geographical footprint. We are positive on the acquisition as it expands SERBADK’s geographical footprint given that CSE has global presence in more than 20 countries, including the USA, Mexico, Australia and New Zealand. 57% of its FY17 revenue was derived from the Americas region, followed by Asia Pacific (37%). Meanwhile, it may also strengthen SERBADK’s capability in IT-related services by potentially integrating CSE’s various IT solution platforms, which include systems automation, integration and packages. SERBADK could also tap its know-how on incinerator technology to enhance its capabilities in sewerage treatment projects.

Improving outlook for CSE. CSE recorded core earnings of SGD13.3m (equivalent to RM39.4m) after stripping off several extraordinary items amounting to SGD58.5m in FY17 while its net assets stood at SGD174.0m as of end-FY17. The acquisition implies trailing PER of 17.7x and PBV of 1.3x. While the valuation may appear to be high, the management is confident that the outlook is improving with potential new orders from greenfield (comprises new installations) and brownfield (comprises maintenance, upgrade and enhancement of existing installations) projects. The acquisition will be fully funded via borrowings, which will lift FY18E net gearing to 0.23x from 0.15x.

Upgrade FY18-19E earnings by 1.4% after imputing: (i) CSE’s earnings starting from mid-April this year with 15% earnings growth, and (ii) higher finance cost as a result of increased borrowings post acquisition.

Reiterate OUTPERFORM call with higher TP of RM3.95. Post earnings adjustment, our TP is adjusted to RM3.95 from RM3.90 previously, pegged to unchanged FY18E PER of 15.0x. We continue to like SERBADK for: (i) its decent earnings growth of 25-13% in FY18-19E backed by both O&M and EPCC segments via geographical expansion, (ii) stable margins of 11.7-11.2%, and (iii) superior ROE of 19-18%.

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

Source: Kenanga Research - 16 Apr 2018