SERBADK posted another set of record high earnings yet again in FY19, beating expectations, thanks to growth from both core segments of O&M and EPCC. Moving forward, the group is targeting to reach RM15b order book by end-FY20, after having successfully hitting its target of RM10b orderbook by end-FY19. Reiterate OUTPERFORM, higher TP of RM3.05, with further contract wins and continued earnings growth delivery as catalysts.

Exceeded expectations. SERBADK posted FY19 net profit of RM496.6m, exceeding our/consensus forecasts by 9%/5%, due to stronger O&M and EPCC operations. Likewise, the company also announced dividends of 1.4 sen per share, bringing full-year dividend payments to 4.9 sen per share (on an ex-basis), also exceeding expectation.

Another set of record breaking earnings. FY19 net profit leapt an impressive 27% YoY, led by strong growth from both O&M and EPCC segments, especially in the company’s core business regions in the Middle East and Malaysia, although this was somewhat offset by higher finance costs. Meanwhile, 4QFY19 registered yet another set of record earnings, with net profit of RM140.9m – jumping 25% both YoY and QoQ, also on the back of commendable growth in both O&M and EPCC core segments.

Growing from strength to strength. Having successfully achieving their target of RM10b order-book by end-FY19, the company is now setting yet another ambitious target of RM15b order-book by end-FY20. Order-book replenishment will not only be supported by new tender wins, but also renewals of existing contracts, as well as tapping into new international markets e.g. U.S. and Mexico. Meanwhile, the company’s Bintulu Integrated Energy is expected to be up and running by end-1QFY20, as well as its Pengerang Eco-Industrial Park which is expected to be completed by 4QFY20. Both of these new developments would help propel the company in terms of operational capacity, allowing them enhanced competitiveness for job tendering and execution. With that said, in order to fuel the company’s ambitious growth targets, we do not discount the possibility of a fund raising exercise during the year.

Reiterate OUTPERFORM. Post-results, we raised our FY20E CNP by 9%, accounting for stronger O&M and EPCC, while simultaneously introducing new FY21E figures. Our FY20-21E CNP represents growth of 13-12%, which we think is fairly conservative. Following this, our TP has also been raised to RM3.05 (from RM2.50 previously), as we roll over our valuation base-year to FY21E, pegged to an unchanged PER of 15x.

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 - 27 Feb 2020