SERBADK was awarded 9 new contracts (5 overseas, 4 local), amounting to a guesstimated ~RM561m. We are positive on the new wins, showcasing the group’s bidding edge, as well as furthering its expansion into ICT segment. This brings its order-book to a high of RM18.7b, of which ~40% is from oil and gas. Maintain OUTPERFORM, with TP of RM2.75.

Nine new contracts. SERBADK announced that it had secured a total of nine new contracts, consisting of: (i) five from overseas, with a combined estimated contract value of USD114.3m (or ~RM465.9m), and (ii) four locally, with no specific value as they are on “call-out” basis whereby the work orders will be awarded at the discretion of the clients (refer to table below for further breakdown of contract details). Nonetheless, we guesstimate the local contracts to be worth up to ~RM95m, bringing all the wins combined to a total value of ~RM561m.

Positive on the new wins. We are undoubtedly positive on the contract wins, displaying SERBADK’s outstanding job delivery and contract winning capabilities, especially during the current challenging environment. We expect these contracts to fetch gross margins of ~15%, in line with the group’s historical average.

More particularly, we are also further positive on the two ICT contracts won in Indonesia and Guinea, seeing this as the continued fruition of the group’s efforts of expanding into the sector. We guesstimate these two contracts wins to be worth up to ~USD45m. The segment is beginning to see meaningful contributions towards the bottom-line for the past 1-2 quarters, and with continued initiatives of expanding into the sector, we are likely to see this trend continuing and further improve.

Strength in order-book. This marks the company’s fifth contract win announcement YTD, bringing YTD wins to ~RM11.4b. This also brings its current order-book to a high of RM18.7b, of which ~40% is derived from oil and gas. With continued wins in other areas, the group is expected to gradually reduce its reliance in oil and gas, and thereby improving resiliency in earnings.

Maintain OUTPERFORM. Post-announcement, we raised our FY21E earnings by 1% as we slightly bumped our order-book replenishment assumption to RM11b (from RM10b). Our TP is also subsequently slightly raised to RM2.75 (from RM2.70), pegged to 15x PER on FY21E. We continue to like SERBADK given its superb record of earnings growth delivery, and for also having one of the best ROEs within the sector.

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 - 4 Dec 2020