SERBADK has won a massive construction award of USD1.8b (or ~RM7.7b) in Abu Dhabi, UAE - its largest contract win to-date, bumping its order-book to RM17b, providing 4-5 years’ visibility. Overall, we are positive on the award, displaying the company’s sustained drive for growth and flexibility in not over-relying purely on oil and gas jobs, especially when the sector is facing a downturn. Maintain OUTPERFORM, with TP of RM3.05.

Massive contract award from UAE. SERBADK announced that it has received and accepted a letter of award from Block 7 Investments L.L.C for the engineering, procurement and construction of innovation hub, academic campus, related facilities and IT infrastructure – all in Abu Dhabi, UAE. Contract value is a fixed lump sum price of ~USD1.8b (or ~RM7.7b), and will be completed within 4 years.

Key take-away from the contract win. This represents SERBADK’s single largest contract award to date, and this also its second contract win YTD, bringing YTD contract wins to ~RM8.6b, and rendering management’s full-year contract replenishment target of RM10b to seem highly achievable. Post-award, order-book will be bumped up to RM17b (from RM10b as at end-FY19), providing 4-5 years’ visibility, and slightly exceeding management’s order-book target of RM15b by end-FY2020, although this is expected to gradually taper down throughout the year as revenues are recognised. We expect this contract to fetch gross margins within the low-teens percentage.

Contract award a huge positive. Overall, we are positive on the contract win, displaying the company’s contract winning abilities and continued drive for growth. The contract award also showcases SERBADK’s flexibility in not over-relying purely on oil and gas jobs, especially when the sector in the midst of facing a downturn. While project execution risk is undeniably present, given the large contract size, we believe SERBADK would be sub-contracting 20-30% of the jobs in which it does not have expertise. These portions would most likely include civil engineering and construction works.

Potential fund raising? We believe SERBADK may be required to fork out upfront working capital of between RM500m-RM700m to execute its order-book. In order to maintain its net-gearing below 1.0x (currently at 0.8x), we believe a corporate exercise could be possible within the year. Most likely, the company could be seeking for an additional 10% placement, given that it still has shareholders’ mandate which could roughly raise ~RM500m (based on last price).

Maintain OUTPERFORM, with unchanged TP of RM3.05, pegged to 15x PER on FY21E EPS. No change to our FY20-21E numbers as the contract win is still within our FY20E replenishment assumption of RM10b. No share base dilution has been factored into our valuations yet. We continue to like SERBADK as it has one of the best earnings growth delivery track records among its 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 - 16 Apr 2020