SERBADK continued to deliver, posting a solid set of 2QFY20 results (+13% YoY), mainly thanks to greater O&M works. Moving forward, successful execution of its order book of RM18.5b should continue fuelling short-term earnings growth, while the group has also put in place plans for longer-term growth via its ventures into offshore fabrication as well as expansion of its ICT segment. Maintain OUTPERFORM with TP of RM2.70.

Within expectations. SERBADK posted 1HFY20 net profit of RM281.6m, coming in within expectations at 52% and 50% of our and consensus full-year forecasts, respectively. The company also announced an interim dividend of 1.3 sen per share, bringing YTD dividends to 2.5 sen per share – also in line with expectations.

Overall stronger results. 1HFY20 saw its net profit grew by 16% YoY, mainly helped by its O&M segment as the group saw more works in Middle East and Malaysia. Meanwhile, slight improvements in EPCC and explosive growth in ICT (although relatively still small earnings contribution) also partially contributed to the earnings growth. For the quarter of 2QFY20, the group recorded a net profit of RM147.9m, representing a 13% growth YoY. This was mainly due to greater works in its O&M and ICT segments, while its EPCC segment stayed relatively flattish. QoQ, earnings increased 11%, helped by: (i) higher O&M works in Qatar, Oman and Malaysia, and (ii) explosive ICT growth from job execution of a contract in UAE. Meanwhile, EPCC stayed relatively flat QoQ.

Still in growth mode. Despite being a mostly challenging quarter for the oil and gas industry, as well as the overall global economy, due to the impact of lockdowns amidst the Covid-19 pandemic, SERBADK had proven once again its earnings base resiliency by being able to continue delivering earnings growth. With the group’s order-book currently at a strong RM18.5b, we believe successful job execution and delivery is crucial for the group to be able to continue its unblemished earnings delivery track record. The group has also put in place ventures into offshore fabrication for the oil and gas sector, as well as expansions of its ICT segment to continue fuelling growth over the longer term.

Maintain OUTPERFORM, with unchanged TP of RM2.70, pegged to 15x PER on FY21E EPS. No changes to our FY20-21E numbers post results.

We continue to like SERBADK given its superb record of earnings delivery and proven resiliency. With only ~40% if 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, (iii) jobs execution risks.

Source: Kenanga Research - 26 Aug 2020