1H18 results came in line with expectations, driven by higher O&M activities masking lower EPCC contribution. Moving forward, earnings growth is buoyed by outstanding order-book of RM6.9b, with YTD-wins totalling RM1.6b against our assumptions of RM3b order-book replenishment for FY18. Reiterate OUTPERFORM, with higher TP of RM4.45, on the back of continued earnings delivery as a share price catalyst.

Within expectations. 1H18 net profit of RM195.4m (+21% YoY) came in well within expectations at 51% of both our and consensus full-year earnings forecasts. The announced dividend of 2.15 sen per share is also within expectations, bringing YTD dividends to 4.05 sen per share (against 1H17 of 3.7 sen and our FY18E DPS of 7.9 sen).

Record quarterly profits. The commendable 2Q18 net profit of RM102.7m (+24% YoY; +11% QoQ), in tandem with revenue growth of 24%/10% YoY/QoQ, was driven by higher MRO activities in Middle East region coupled with increases in IRM activity; thus, driving O&M segmental earnings growth of 32%/10% YoY/QoQ, masking lower EPCC works (-36.7% YoY, -17% QoQ). Cumulatively, 1H18 earnings were driven by similar factors of higher O&M activities (+24% YoY), offsetting lower EPCC earnings (-5%) due to lower margin jobs mix.

Continued earnings delivery. Moving forward, earnings growth will be buoyed by current outstanding order-book of RM6.9b coupled with additional contract wins expected for the remainder of the year as management guided for a targeted order-book of RM7.5b by end-FY18. YTD, the company had secured a total contract value of RM1.6b against our FY18 order-book replenishment assumption of RM3b. Furthermore, recent acquisitions of CSE, Al Sagar and Green & Smart are deemed as positive inorganic growth drivers as they expand SERBADK’s geographical footprint as well as operational capabilities to spur continued earnings delivery. Post-results, we made no changes to our FY18-19E assumptions.

Reiterate OUTPERFORM with higher TP of RM4.45 (from RM3.95 previously), as we roll forward our valuation base year to FY19E based on unchanged valuations of 15x PER. We continue to like the counter for its: (i) continued and consistent earnings delivery, (ii) dynamic expansions into new regions through inorganic growth, and (iii) first- mover advantage through good management at the forefront of technology adoption, leading to improved operational efficiencies.

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

Source: Kenanga Research - 30 Aug 2018