SERBADK has won 3 overseas and 7 local contracts, guesstimated to worth ~RM760m in total. Among them are two ICT contracts from Zambia, which is the largest ICT contract in the company’s history. This is a huge boost for its ambition of growing the ICT business into its third core segment, besides broadening revenue drivers. The group’s order-book now stands at a strong ~RM17.5b. Maintain OUTPERFORM, with TP of RM2.70. Still like the name given its resilient earnings growth delivery.

Series of contract wins. SERBADK announced that it has secured three overseas contracts, specifically one EPCC job from Indonesia, and two ICT contracts from Zambia, worth approximately USD126.8m combined (~RM543.5m). Additionally, the company also announced seven O&M contracts locally in Malaysia. While the local contracts do not carry specific values, as they are on a “call-out” basis, we guesstimate the local contracts to be worth ~RM220m combined. Thus, this brings total wins to an estimated sum of ~RM760m. Refer table below for detailed breakdown of contracts awarded.

Biggest ICT win for the company. We surmise that the bulk of the overseas contract sum stems from the ICT contracts in Zambia (i.e. >USD100m), thus these contracts are the largest ICT contracts in the company’s history. This is a huge boost to the group’s ambition of growing its ICT segment to be its third core business, complementing the two other core segments of O&M and EPCC, as well as broadening the company’s revenue base. Contribution from the segment is still relatively inconsequential at the moment, but the company is targeting the segment to grow to ~RM300m revenue contribution by year-end (~5% of FY20E revenue). Additionally, this also marks the company’s first contract in Zambia, as well as its second in Africa (the group has existing contracts in Tanzania). As for the local contract wins, the contracts would further solidify SERBADK’s market leading position within the domestic onshore maintenance space.

Financial impact from the contracts. The contract wins represent the group’s third contract win YTD, bringing YTD wins to ~RM9.4b. Post win, its order-book currently stands at ~RM17.5b, providing ~3-4 years of revenue visibility. We expect these contracts to fetch 15-20% gross margins, in line with the company’s historical average.

Maintain OUTPERFORM, with unchanged TP of RM2.70, pegged to 15x PER on FY21E EPS. No changes to our FY20-21E numbers, as the contract wins are still within our FY20E replenishment assumption of RM10b. We continue to like SERBADK given its superb record of earnings growth delivery, and also having one of the best ROEs within the sector. With only ~40% of its order-book exposed to oil and gas, we believe it to be one of the few resilient names among its peers to better navigate through the current oil down-cycle.

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 - 1 Jul 2020