Yesterday, SERBADK announced (i) proposed acquisition of 42.26% stake in E&E Gas, and (ii) EPCC contract win of RM332.8m. Overall, we are positive on the announcement. This marks the company’s maiden venture into LNG, while the EPCC contract brings YTD wins to RM2.5b and orderbook to RM7.5b. Reiterate OUTPERFORM and TP of RM4.45, with it being our TOP PICK within the oil and gas sector.

Acquisition and contract win. Yesterday, SERBADK announced (i) proposed acquisition of 42.26% equity stake in E&E Gas Sdn Bhd, a company primarily engaged in the provision of integrated mid-scale LNG infrastructures, with the mode of settlement being the transfer of a land measuring approximately 10 acres located in Mukim Lumut, Perak, valued at approximately RM16m, and (ii) proposed subscription of redeemable convertible preference shares (RCPS) in E&E Gas worth RM10.4m, settled by cash – bringing total equity injection into E&E Gas to approximately RM26.4m. Simultaneously, SERBADK was also awarded an engineering, procurement, construction and commissioning (EPCC) contract for offshore LNG distribution infrastructure facilities from E&E Gas located on the aforementioned land in Lumut, Perak, with a contract value of approximately RM332.8m.

Acquisition of E&E Gas. We are positive on the SERBADK’s 42.26% equity stake acquisition of E&E Gas, seeing that (i) it jives with company’s strategy of asset ownership, (ii) it represents the company’s maiden venture into LNG, and more importantly (iii) it adds further contract win prospects for SERBADK, thus providing a synergistic value-add towards the company’s existing bread-and-butter business in O&M and EPCC. Nonetheless, we see minimal impact towards the company’s balance sheet post-acquisition, with net-gearing level of around 0.3x as at end-2Q18.

EPCC contract win. Meanwhile, we are also positive on the EPCC win of RM332.8m, adding further visibility towards the company’s growth prospects. This brings YTD new contract wins to around RM2.5b, and bumping up the company’s orderbook to RM7.5b. We expect gross margins for the EPCC contract to be around 17%, in-line with SERBADK’s historical average. We made no changes to our FY18-19E numbers as the new win is still within our orderbook replenishment assumption of RM3b.

Reiterate OUTPERFORM, with unchanged TP of RM4.45, pegged to 15x PER on FY19E – roughly +1.5SD from its average and c.20% discounted from our oil and gas sector’s average. We continue to like SERBADK, with it being our TOP PICK within the oil and gas sector, given its; (i) consistent and commendable track record of earnings growth delivery, (ii) dynamic expansions into new markets through inorganic growth, and (iii) superior ROE among its peers – 22% versus sector average of 8%.

Risk to our call includes (i) lower-than-expected orderbook replenishment, (ii) weaker-than-expected margins, and (iii) geopolitical unrest in the Middle-east affecting oil and gas-related activities.

Source: Kenanga Research - 01 Nov 2018