SERBADK had proposed a 10% private placement, expected completion by 2QCY20. Based on an illustrative issue price of RM1.47, the exercise will raise RM451m, mainly for borrowings repayment and working capital. This will result in an interest saving of RM15m/year (or 3-2% of FY20-21E earnings), and reduce net-gearing to 0.7x (from 0.8x). Overall, the funds raised will increase financial flexibility for the company to continue delivering its growth targets. Maintain OUTPERFORM with lowered TP of RM2.80, after factoring in the share base dilution.

Equity fund raising via 10% private placement. SERBADK has proposed to undertake a private placement of up to 10% of the total number of issued shares of the company, at a later-determined issue price. Barring any unforeseen circumstances, the private placement is expected to be completed by 2QCY20.

Not overly surprised. Overall, we were not overly surprised by the proposed private placement. As mentioned in our report dated 16 April 2020, we surmised that the company will be required to raise equity funds of ~10% of its value in order to meet working capital requirements to fund its order book (RM17b currently), without breaching its 1.0x net-gearing ceiling.

Impact from the private placement. Based on an illustrative issue price of RM1.47, the private placement is expected to raise RM451m of gross proceeds, of which (i) RM200m will be used for the partial repayment of bank borrowings, and (ii) RM239m allocated to working capital, with the remainder to be used as fund raising expenses. Based on a weighted average interest rate of 7.5%, the reduced borrowings are expected to result in an interest saving of RM15m/year (or 3-2% of FY20-21E earnings). Meanwhile, its net-gearing will also be reduced to 0.7x, from 0.8x as at end-FY19.

New funds to increase financial flexibility. While we have viewed this fund raising exercise as an inevitable eventuality to maintain its net-gearing under 1.0x, the injection of these new funds will nonetheless increase financial flexibility for the group to fund its growth strategy. The company is currently well on track to exceeding its endFY20 order book target of RM15b, and continuing its stellar track record of earnings growth delivery.

Maintain OUTPERFORM, with a lowered TP of RM2.80 (from previously RM3.05), as we factored in a 10% share base dilution arising from the proposed private placement. Our TP is based on 15x PER on FY21E. We continue to like SERBADK as it has one of the best earnings growth delivery track record among its peers. Additionally, SERBADK should be one of the least impacted players by the current oil downturn, as only ~40% of its order-book is exposed to the oil and gas sector. An established international energy services provider player (in its key markets (i.e. Middle-East and Malaysia) which has been categorised under “essentials services”, the company had recently stated in the press that it’s “business as usual” and it has not seen its operations being significantly affected by the current situation. 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, (iii) project execution and delivery.

Source: Kenanga Research - 24 Apr 2020