Previewing the upcoming 3Q18 results, we are expecting net profit to decline 20-30% sequentially to c.RM70-80m, on seasonality with slower O&M works in the Middle-East due to the summer months. Nonetheless, the results are still expected to be better than last year. Overall, we still keep FY18-19E earnings forecasts intact, backed by order-book of RM7.5b – highest in its record. Maintain OUTPERFORM with unchanged TP of RM4.45.

Expecting sequentially weaker 3Q18. Previewing SERBADK’s upcoming 3Q18 quarterly results (set to be released later this month), we expect net profit to come in within the range of RM70-80m – implying 20-30% QoQ decline from 2Q18 of RM102.7m. This is because of an expectedly seasonally weaker 3Q, due to the summer months, in which we projected an estimated slowdown in downstream operation and maintenance (O&M) works by roughly a third, particularly in the Middle-East, which is SERBADK’s stronghold, having contributed 70% to 1H18’s revenue. Nonetheless, this still represents a positive YoY growth within the range of 3-18% for 3Q18 from RM68m in 3Q17, and cumulative 9M18 growth of 16-20% from 9M17 of RM229.5m, which we think is still commendable in its own right.

Earnings forecasts still deemed intact. Overall, despite the expectedly dampened 3Q18 numbers, we still maintain our earnings forecasts of RM386.8m/RM435.2m for FY18E/FY19E which comparatively is still 1%/8% lower than consensus estimates given our slightly more conservative margin assumptions. We believe the seasonally weaker 3Q18 may be offset by a seasonally stronger 4Q given the increase in oil production ahead of the winter months, coupled with the front-loading of O&M activities before the year-end. SERBADK’s forward earnings are buoyed by its order-book of RM7.5b – its highest ever in record, on the back of YTD new contract wins of RM2.5b. Of the RM7.5b order-book, we reckon most of it, roughly RM5b, is from O&M, which is expected to be recurring in nature, while the remainder of c.RM2.5b is from EPCC.

Expansions into new markets. SERBADK has always maintained its asset ownership business model as the company sees this as a strategic avenue to increase its contract winning capabilities, while also providing synergistic integration towards its core competencies. YTD, the company has made total acquisitions amounting to c.RM261m, all of which are minority stakes in various companies, and management guides that it is still open to further investment opportunities should they provide operational synergy or a boost in job winning abilities. The company is seeking to increase its presence in newer markets such as central Asia, Africa and America. Meanwhile in its stronghold in the Middle-East, the company is eyeing to penetrate markets aside from the oil and gas industry, such as power or water-related projects.

Maintain OUTPERFORM, with unchanged TP of RM4.45, pegged to 15x PER on FY19E earnings. We continue to like SERBADK for its: (i) consistent and commendable track record of earnings growth delivery, (ii) dynamic expansions into new markets, and (iii) superior ROE among its peers (22% versus sector average of 8%).

Risks to our call include: (i) lower-than-expected order-book replenishment, (ii) weaker-than-expected margins, and (iii) geopolitical unrest in the Middle-East affecting oil and gas-related activities.

Source: Kenanga Research - 22 Nov 2018