SERBADK has secured a total of 7 new contracts (1 from Qatar, and 6 local), totalling to an estimated value of RM500m. We are positive on the wins, which bring YTD wins to ~RM1.5b and lifted total order-book to ~RM8.7b. Expect more contract wins moving forward with management targeting order-book to reach RM10b by year end. Reiterate OUTPERFORM with TP of RM4.80.

Seven new contract wins. Yesterday, SERBADK announced securing a total of 7 new contracts, which includes (i) 1 operations and maintenance (O&M) contract from Qatar, worth USD60m (~RM250), and (ii) 5 local O&M, and 1 local engineering, procurement, construction and commissioning (EPCC) contracts, with no specific values attached for the local contracts as they are on “call-out” basis (refer table below for more detailed breakdown of the contracts). Nonetheless, we estimate the local contracts to be roughly worth ~RM250m in total, thus bringing total contracts won from this announcement to a sum of approximately RM500m.

Positive on the contracts. We are positive on the contract wins, highlighting the company’s continued competitiveness and capabilities in securing new jobs, with the Middle-east and Malaysia representing key markets for SERBADK, thereby also strengthening its position within the regions. This brings YTD-wins to roughly RM1.5b (this being its second contract announcement within the year), and order-book to about RM8.7b. Expect the contracts to fetch roughly 17% gross margin on average – largely in-line with the company’s historical average.

Expect more contract wins. Moving forward, expect more contract wins as management targets its order-book to reach RM10b by end of the year, providing earnings visibility for at least the next 2-3 years. While the group’s overall jobs replenishment is still reliant on its stronghold markets such as the Middle-East and locally, we expect more job flows to also come from Central Asia as the company aims to expand into the region. Overall, we made no changes to our forecasts as the announced contract wins are still within our FY19E order-book replenishment assumption of RM2.5b.

Maintain OUTPERFORM, with an unchanged TP of RM4.80, pegged to 15x PER on FY20E – implying ~1.2x PEG ratio. We continue to like SERBADK for having one of the best earnings delivery track records within the oil and gas space, coupled with its good management and best-in-class ROE against other sector peers. Further contract wins and continued earnings delivery would act as catalysts moving forward.

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 - 19 Jun 2019