SERBADK announced a series of corporate exercises entailing, (i) share split, (ii) bonus issue, and (iii) free warrants. While we acknowledge there will be no fundamental impact and no dilution to existing shareholdings, we are positive, nonetheless, as this would help promote trading liquidity for the stock. Maintain OUTPERFORM, with TP of RM5.25 (ex-TP of RM2.50).

Announced share split, bonus issue and free warrants. SERBADK had announced (i) share split, on the basis of 2 existing shares into 3 shares, (ii) bonus issue, on the basis of 2 bonus shares for every 5 subdivided shares, and (iii) free warrants, on the basis of 2 free warrants for every 5 subdivided shares, with the exercise price to be determined at later date, to be expired after 5 years. The exercises are still subject for approvals from Bursa as well as shareholders, and is expected to be concluded by end-2019.

Positive on the exercises. While we acknowledge that the exercises have no fundamental impact towards the company in the near term, we, nonetheless, feel positive towards the exercises as it will help further enhance the marketability and trading liquidity of the share, with the market price of the share also being much more affordable and thus, potentially appealing to a wider group of public shareholders. The exercises are also expected not to result in an immediate dilution of existing shareholdings. Meanwhile, funds raised through the conversion of warrants over the next 5 years could also help with the company’s working capital.

Post-exercise, the company’s share base will be enlarged by 2.1x, excluding warrants conversion. Including full warrants conversion, the company’s share base will be enlarged by 2.7x. For simple illustration purposes, every existing SERBADK share currently owned will result into 2.1 shares and 0.6 warrants.

Reiterate OUTPERFORM, with unchanged TP of RM5.25 (ex-TP of RM2.50), pegged to 15x PER on FY20E – which is around +2SD from its 2-year mean valuations.

We continue to like SERBADK for having one of the best earnings delivery track records within the oil and gas space, coupled with outstanding management and best-in-class ROE against 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 - 3 Sep 2019