9M18 results came in within expectations, driven by higher O&M activities masking lower EPCC contributions. However, 3Q18 was sequentially weaker due to seasonality factor, which saw lower O&M activities in the Middle East. Moving forward, earnings growth is underpinned by orderbook of RM7.5m – highest on record, on the back of YTD new wins of RM2.5b. Reiterate OUTPERFORM, with TP of RM4.45, with continued earnings delivery as catalyst.

Within expectations. 9M19 net profit of RM278.6m came in within expectations at 72%/71% of our/consensus full-year earnings forecasts. Meanwhile, it announced dividends of 1.65 sen per share, also within expectations, bringing YTD dividends to 5.7 sen per share (versus 9M18 of 5.2 sen and our FY18E of 7.9 sen).

Better YoY, but sequential decline. YoY, 9M19 net profit improved 21%, driven by better O&M contribution due to higher MRO activities in the Middle East region, masking lower EPCC contributions and higher finance costs. For the individual quarter of 3Q18, net profit of RM83.2m improved 22% YoY, similarly due to higher O&M activities masking lower EPCC contributions and higher finance costs. However, 3Q18 net profit declined 19% QoQ. This was due to seasonality factor, resulting in lower O&M activities, especially in the Middle East, coupled with lower EPCC works during the quarter and higher finance costs.

Continued earnings delivery. Moving forward, earnings growth will be driven by its current order-book of RM7.5b – its highest ever on record. This comes after it managed to bag new contract wins cumulating YTD to RM2.5b. Of the order-book, we reckon most of it (roughly RM5b) is derived from O&M jobs, while the remainder (roughly RM2.5b) is from EPCC jobs. Meanwhile, the company is continuing to eye expansions into new market through the adoption of its asset ownership business strategy. YTD, it has announced total acquisitions amounting to RM275m, most of which are minority stakes in various companies, which provide improved job-winning capabilities or added operational synergies. Target markets that the company intends on increasing its presence include central Asia, Africa and America. Meanwhile, for its stronghold in the Middle East, the company is seeking to penetrate markets aside from the oil and gas industry, such as power or water- related projects.

Maintain OUTPERFORM, with an 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, (iii) geopolitical unrest in the Middle East affecting oil and gas-related activities.

Source: Kenanga Research - 28 Nov 2018