SERBADK posted yet another record quarter in 1Q19, with earnings matching expectations, led by higher activities in both core O&M and EPCC segments. Expect further contract wins moving forward as the company targets its order-book to reach RM10b by year end, from RM8.3b currently. Reiterate OUTPERFORM and TP of RM4.80, with key catalysts coming from further wins coupled with sustained earnings delivery.

Within expectations. SERBADK posted yet another record quarter with 1Q19 PATAMI coming in at RM112.2m, within expectations, making up 26%/24% of our/consensus full-year forecasts. Announced dividend of 2.3 sen per share, which was also within expectation (versus 1Q18 of 1.9 sen per share).

Record quarter. YoY, PATAMI jumped 21%, underpinned by growth in both its core segments namely; (i) O&M (+38%) on increased MRO activities in Southeast Asia and Middle-east, while (ii) EPCC (+13%) recorded its first contribution from its hydro-power plants in Laos. Sequentially, PATAMI grew a marginal 3% YoY, helped by better EPCC (+3%) mainly from works in the UAE and Laos, offset by lower O&M (-3%), due to decreased activities in Turkmenistan, Bahrain and Qatar. Its “Others” segment also posted a sizable jump from the provision of IT-related services in countries such as Qatar and India.

Further contract wins expected. Moving forward, we expect further contract wins throughout the year as the company targets an end-2019 order-book of RM10b, from the current RM8.3b (YTD wins of ~RM1b) providing 2-3 years of earnings’ visibility. While Malaysia and the Middle-east still remain as the company’s stronghold markets, it is also eyeing further expansion opportunities in the central Asia region, namely in countries such as Turkmenistan, Kazakhstan and Uzbekistan.

Reiterate OUTPERFORM with an unchanged TP of RM4.80, pegged to 15x PER on FY20E, implying <1x PEG ratio. We continue to like SERBADK for having one the best earnings delivery track record within the oil and gas space, coupled with its good management and best-inclass ROE against other oil and gas peers. That said, further contract wins and earnings delivery would act as key catalysts moving forward. Post-results, we kept our FY19-20E numbers unchanged, implying earnings growth of 12-8%.

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 - 30 May 2019