SERBADK posted a record profit in FY18, matching expectations. In fact, 4Q18 net profit of RM109.3m is the best-ever quarterly, led by higher O&M activities. Moving forward, we expect further contract wins with management targeting to reach RM10b order-book by year-end, from RM8.1b currently. Reiterate OP, with a higher TP of RM4.80, being our preferred oil and gas pick, backed by further job wins, earnings delivery and best-in-class ROE.

Within expectations. FY18 posted a record net profit of RM387.9m, coming in within expectations at 100%/99% of our/consensus full-year forecasts. The record earnings were also in-line with our results preview report dated 12 Feb 2019. Meanwhile, the announced dividend of 2.3 sen per share is also within expectation, bringing FY18 dividend totalling to 8.0 sen per share (implying 30% pay-out ratio).

Record high profit. Record high net profit in FY18 (+26% YoY) came in on the back of stronger operating and maintenance (O&M) segment, driven by increased work orders from the Middle East and Central Asia region, offsetting the mild decline in engineering, procurement, construction and commissioning (EPCC) due to slower activities in Malaysia and UAE.

On the quarterly level, 4Q18 also posted a record-high quarterly net profit of RM109.3m, soaring 39% YoY, similarly driven by higher O&M works in the Middle East region, masking mild decline in EPCC due to lesser call-outs in Malaysia and UAE. Sequentially, 4Q18 bounced back 31% from the seasonally weaker 3Q18, driven by higher O&M activities in Qatar, Turkmenistan and Malaysia, coupled with a significant increase in EPCC from newer contracts in UAE and Tanzania.

Expect further contract wins. Currently, the company’s order book stands at around ~RM8.1b, providing earnings visibility for the next ~2 years. That said, we expect more contract wins moving forward as management targets to reach an order book of RM10b by year-end, with the company having already secured its maiden contract wins for the year worth ~RM1b earlier this month. While the group’s overall jobs replenishment is still reliant on its stronghold markets in the Middle-East and locally, we anticipate more job flows to also come from Central Asia as the company seeks to expand into the region.

Reiterate OUTPERFORM, being our preferred pick within the oil and gas sector, with key catalyst being continued new contract wins and earnings delivery, coupled with its best-in-class ROE among oil and gas peers. Post-results, we made no changes to our FY19E numbers, while introducing FY20E, implying earnings growth of 12-8% for the coming two years. That said, our earnings forecasts are currently 7-15% below consensus given our more conservative margins and contract replenishment assumption. As such, we may see a potential upside from our numbers. Meanwhile, our TP is also raised to RM4.80 (from RM4.45 previously) as we roll forward our valuation base year to FY20E, pegged to an unchanged valuation of 15x PER.

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 Feb 2019