INVESTMENT MERIT

Following the emergence of Dato’ Karim as its largest shareholder, SCIB is now set to aggressively expand its construction arm, spurring explosive earnings growth. It plans to do so by expanding into new international markets, such as the Middle East, as well as strengthening positioning within the local space. Being a Sarawak-based company as well as the largest IBS manufacturer in East Malaysia, SCIB could be a potential dark horse amidst an opportune Sarawak construction thematic play. TRADING BUY with Fair Value of RM3.90.

New shareholder and management. Sarawak Consolidated Industries Berhad (SCIB) was founded in 1975, specialising in manufacturing of precast concrete products. However, last year, Dato’ Mohd Abdul Karim, founder and largest shareholder of Serba Dinamik (currently holding 25.8% stake), emerged as the company’s largest shareholder, with his holdings of SCIB currently at 38.3%. Following his emergence as largest shareholder, he was appointed as non independent non-executive chairman of SCIB, and along with him, the new group CEO, Encik Rosland, and new finance director, Encik Mohd Ariff – both of whom are also from Serba Dinamik.

Ambitious growth targets. Concurrent with the emergence of a new major shareholder and management, the company is now strengthening its construction business, and setting highly ambitious growth targets, aiming to hit >RM1.5b order-book by end-FY20. Historically a purely Sarawak-based company, under the new leadership, SCIB now aims to penetrate new overseas markets, such as the Middle East (e.g. Qatar, Oman) and Indonesia, as well as locally in Malaysia, especially in its home soil of Sarawak. Our explosive earnings growth forecasts for FY20-21E (implying 3-year CAGR of >300%) are also broadly based on these targets. In order to achieve these targets, SCIB will be leveraging on management’s and Dato’ Karim’s established experiences and connections from Serba Dinamik to land contracts and establish an early track record. All the aforementioned regions are also considered Serba Dinamik’s stronghold markets, especially the Middle East where it is the largest earnings contributor to the group. Additionally, we also do not discount the possibility of Serba Dinamik subcontracting works to SCIB in the near future, after having secured mandates for related party transactions from both sets of shareholders.

Sarawak play. With the upcoming Sarawak state elections in 2021 and a potential record state budget (refer overleaf), SCIB could be a dark horse within the state’s construction sector, competing against more established names such as CMS, Naim and HSL. SCIB is said to have submitted tenders for various Sarawak infrastructure projects, such as coastal roads, water supply grid programs, as well as building of schools, roads, and bridges. Being the largest IBS and precast concrete manufacturer in East Malaysia also provides SCIB an added competitive advantage against other local players.

TRADING BUY, with Fair Value of RM3.90, pegged to 8x FY21 PER – which is at the lower end of our small-mid cap construction targets of 7-12x PER and in-line with peers’ average. Peers include: (i) KIMLUN - exposure to construction and IBS manufacturing, (ii) KERJAYA - involvement in private projects, and (iii) HSL - Sarawak play.

Risks to our call include: (i) failure to secure new contracts to hit order-book targets, (ii) job execution risks, given their newcomer status in the industry, (iii) costs overruns, (iv) high net gearing.

Source: Kenanga Research - 20 Jul 2020