1Q18 results came within expectations with earnings growing 18% YoY, thanks to stronger contribution from both EPCC and O&M segments. With no changes to our earnings estimates, we maintain OP call with an unchanged TP of RM3.95 pegged to 15x FY18E PER with catalysts being its decent earnings delivery and better contract flows.

Within expectations. 1Q18 core net profit (CNP) of RM92.6m (+15% QoQ, +18% YoY) came within expectations at 24% of our/consensus full-year estimates. A 1st interim dividend of 1.9 sen/share was proposed at 30% payout ratio, as expected.

The sequential results boosted by lower taxation. Despite revenue contracting 8%, 1Q18 earnings leapt by 15% QoQ to RM92.6m mainly due to lower tax expense (-86%; lower effective tax rate of 3.9% vs. 25.1% in 4Q17). Recall that SERBADK has received additional RM45.0m tax expense to be claimed from the tax authority for the assessment period 2010-2015, which had been recognised in 3Q17 and 4Q17 at RM20m and RM25m, respectively, which masked weaker EPCC (-25%; lower project billings) and O&M segments (-6%; lower activities in Middle East and Malaysia due to seasonality).

Stronger yearly results from O&M and EPCC. Meanwhile, net earnings improved by 18% YoY from RM78.3m in 1Q17 underpinned by stronger contribution from both O&M (+17%; higher IRM activities in Middle East and Turkmenistan) and EPCC (+63%; higher project billings from local and UAE) segments.

Recent acquisition to expand its geographical footprint. The acquisition of 24.8% stake in SGX-listed CSE last month will expand SERBADK’s geographical footprint given that CSE has global presence in more than 20 countries, including the USA, Mexico, Australia and New Zealand. Meanwhile, it may also strengthen SERBADK’s capability in IT-related services in 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.

Reiterate OUTPERFORM call. Order-book remains robust at RM6.2b including RM4.2b in O&M and RM2b in EPCC projects, which provide 2-year earnings visibility. With no changes to earnings estimates, we maintain OUTPERFORM call on the counter with unchanged TP of RM3.95 pegged to 15.0x FY18E PER. We continue to like SERBADK for: (i) its decent earnings growth of 25-13% in FY18-19 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 - 23 May 2018