SERBADK’s 3QFY19 results came within expectations, posting a YoY growth of 36% from higher O&M and EPCC activities, although QoQ decline of 13% was well anticipated due to summer seasonality factor. Moving forward, the group is targeting to reach RM15b order-book by end-FY20 (from RM10b currently) and maintaining its earnings growth target of 15-20%. Reiterate OUTPERFORM and TP of RM5.25 (or RM2.50 on an ex-basis).

Within expectations. SERBADK posted 9MFY19 net profit of RM355.8m, coming in within expectations at 78%/76% of our/consensus full-year earnings forecasts. Announced dividend of 2.34 sen per share (or 1.11 sen per share on an ex-basis) was also within expectations, bringing YTD dividends of 7.3 sen per share.

Seasonally weaker quarter. YoY, strong results (3QFY19: +36%, cumulative 9MFY19: +28%) were driven by both its core segment, as (i) O&M saw greater activities from maintenance, repair and overhaul of rotating equipment from regions such as the Middle East and Malaysia, while (ii) EPCC posted greater billings from jobs in Tanzania and UAE. However, 3QFY19 results were sequentially weaker by 13% QoQ, as 3Q is typically a seasonally weaker quarter due to the summer weather. As such, the quarter saw slower O&M and EPCC activities from the Middle East.

Strong growth to sustain. With the group having already met its target of reaching RM10b order-book by end-FY19, moving forward, the group is setting a new target of RM15b order book by end-FY20. Earnings-wise, the group is also targeting to continue its current trajectory of 15-20% growth YoY (hence, implying further upsides to our FY20E numbers, with current forecasts of only 13% growth). The group’s recently secured master service agreement from Petronas would help to further strengthen its position in the Malaysian market, while continued efforts in penetrating the central Asia region, as well as established strength in the Middle East would continue to anchor growth.

Reiterate OUTPERFORM, with unchanged TP of RM5.25 (or RM2.50 on an ex-basis) pegged to 15x PER on FY20E – which is around +2SD from its 2-year mean valuations. No changes were made to our FY19- 20E numbers post-results, implying earnings growth of 17%/13%.

We continue to like SERBADK for having one of the best earnings delivery track records within the oil and gas space, coupled with its outstanding management. 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 - 26 Nov 2019