SERBADK is set to deliver its strongest quarterly earnings for the year of c.RM108m in 4Q18, on the back of higher O&M activities ahead of the winter months. Going forward, its order-book is expected to reach RM10b by year-end, from RM7.5b currently, keeping them busy at least over the next three years. Reiterate OP and TP of RM4.45 for earnings growth story and undemanding valuation. It is also our top-pick for the oil & gas sector.

Expecting stronger 4Q18 results. On the back of its seasonally weaker 3Q18 due to the slowdown in downstream O&M works in the Middle-East in the summer months, we believe its 4Q18 results, set to be released by this month, are expected to post stronger sequential performance. In fact, we expect 4Q18 to be the strongest quarter of the year, arising from increased oil production ahead of the winter months, coupled with front-loading of O&M activities before the year-end. As such, we believe our FY18E earnings are on track, with 4Q18 profit estimated to jump 30%/34% YoY/QoQ to RM108m.

Looking into 2019. Currently, SERBADK has an outstanding orderbook of RM7.5b, on the back of RM2.5b new wins in 2018 – highest in record, and meeting management’s guidance. Moving forward, management guides for order-book to reach RM10b by end-FY19, providing earnings visibility for at least the next 3 years. While the group’s overall jobs replenishment is still reliant on its stronghold in the Middle-East, the group is also expected to expand into newer markets locally as well as in Central Asia. Our FY19E numbers have imputed a conservative order-book replenishment of RM2.5b, similar to FY18. That said, with our FY19E forecast being 8% below consensus given more conservative margins and replenishment assumptions, we may potentially see earnings upside from our numbers.

Asset ownership business model. 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. To recap, SERBADK has made total acquisitions worth c.RM290m in FY18. Most of these acquisitions are minority stakes in various companies, providing improved job-winning capabilities or added operational synergies. Through these inorganic growth avenues, the company is seeking to increase its presence in target markets such as Central Asia, Africa and America. Meanwhile, for its stronghold in the Middle East, the company is seeking to penetrate new 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. With the oil and gas sector facing heavy sell-downs in recent months, we are selective in our stock picks within the sector – favouring names that are resilient and promise earnings delivery. Hence, we reiterate SERBADK as our preferred pick within the oil and gas sector, given its: (i) resilient business nature and commendable earnings delivery, (ii) undemanding valuations considering its earnings growth – currently trading at 14-12x PER, with earnings growth of 25-13% for FY18-19E, and (iii) best-in-class ROE among its peers. 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 - 12 Feb 2019