SERBADK announced the securing of 3 overseas and 6 local contracts yesterday, totalling to an estimated value of RM1b. We are positive on the wins, lifting its order-book to c.RM8.3b. Overall, we expect more wins moving forward, with management targeting order-book to reach RM10b by year-end. Reiterate OP and TP of RM4.45 for its earnings growth story and undemanding valuations. It is our top-pick for the oil & gas sector.

First contract wins of the year. Yesterday, SERBADK announced securing 3 O&M contracts overseas, with a combined value at USD110m, as well as 6 O&M and EPCC contracts locally (refer table below for a detailed breakdown). While the values of the local contracts were undisclosed, we estimate it to be roughly around the region of RM600m – bringing the total value of contracts announced yesterday to c.RM1b.

Positive on the new wins. We are extremely positive on the contract wins, highlighting the company’s operational competency as well as competitiveness and capabilities in penetrating markets to secure new contracts. In fact, the contract in Uzbekistan represents its maiden win in the country, furthering the company’s ambitions of expanding into the Central Asia region. Additionally, the two MCM contracts secured from Petronas Carigali also represent the company landing its first “packaged” maintenance jobs (as opposed to facility-specific or specialised maintenance jobs typically). We expect gross margins for the new contracts to be roughly 17% - in-line with the company’s historical average, with the exception of the MCM contracts, fetching lower margins of approximately 12-15% given its more competitive bidding nature. All-in, the new wins are expected to lift the company’s latest order-book figure to an estimated RM8.3b.

Expect more contract wins. Moving forward, we expect more contract wins as management targets its 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 markets in the Middle-East and locally, we expect more jobs flow to also come from Central Asia as the company aims to expand into the region. Overall, we made no changes to our FY18-19E forecasts as the announced contract wins are still within our FY19 replenishment assumption of RM2.5b. That said, with our FY19E earnings forecast being 8% lower than consensus given more conservative margins and replenishment assumptions, we may potentially see earnings upside from our numbers.

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 14-13x 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 - 13 Feb 2019