Yesterday, SERBADK made two positive announcements namely; (i) 15% acquisition of GSH for RM17m, which would allow SERBADK to increase its EPCC capabilities and tap into new markets, and (ii) RM269m maiden EPCC in Laos for two hydropower stations. Overall, we maintain our forecasts as contributions from GSH are minimal while YTD contract wins of RM1.6b is still within our replenishment target. Reiterate OP with unchanged TP of RM3.95.

15% acquisition of GSH. Yesterday, SERBADK announced that they are acquiring 15% of GSH (Green & Smart Holdings Plc listed in LSE) for RM17m (GBP3.2m) through a subscription of 15% new shares private placement. GSH’s core business is power generation from two biogas power plants (built from proprietary technology) where treated biogas from palm oil effluents are used to generate electricity to be sold to TENAGA or neighbouring palm oil mills. Furthermore, GSH does EPCC works for wastewater treatment plants and consultancy services within the renewable energy space. The transaction is expected to be completed in 3Q18 and GSH would be an associate company to SERBADK.

Synergistic acquisition. We are positive over the 15% acquisition in GSH, which would allow SERBADK to expand its EPCC capabilities in building biogas plants for the palm oil effluent treatment space and tap into massive palm oil markets like Indonesia. In addition, the acquisition would put SERBADK as a frontrunner for GSH’s remaining eight biogas power plant projects (with total contract value of c.RM160m) around Malaysia. Note, GSH has awarded SERBADK the EPCC works for their 3rd biogas plant located at Teluk Intan (Perak) back in February 2018. Based on GSH’s FY16A earnings of RM10m, we find the acquisition price tag fair as it implies 11x PE, which is at a discount to SERBADK’s current multiple of 14x. Post-acquisition, SERBADK’s net gearing will rise marginally to 0.07x (from 0.06x).

New EPCC contract. Separately, SERBADK announced that it has secured an EPCC contract in Laos worth RM268.8m (USD66.2m) from Nam Taep 1,2,3 Hydropower Company Ltd. The EPCC scope comprises works for Nam Taep 1 and 2 hydropower stations, which are capable of generating 30MW of energy slated for completion within 43 months. We are positive on the win as this marks SERBADK’s first contract in Laos, which showcased their ability to secure contracts in new markets. Nonetheless, SERBADK’s YTD wins of RM1.6b (outstanding order-book RM6.9b) is still in line with our FY18 replenishment assumption of RM3.0b. Margins-wise, we reckon that the job should match its historical GP margins of c.17% for EPCC works.

Keeping forecasts unchanged. While the 15% GSH acquisition would be accretive to SERBADK’s bottomline (c.+RM1.5m/annum), we make no changes to our earnings estimates as the contribution is minimal accounting for <1% of our FY18-19E earnings.

Reiterate OUTPERFORM with an 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%. We expect positive catalysts from: (i) delivery of quarterly earnings, and (ii) continuous contract flows from new and existing customers. Risks to our call include: (i) lower-than-expected order book replenishment, (ii) failure to execute power plants, and (iii) weaker-than-expected margins.

Source: Kenanga Research - 20 Jul 2018