SERBADK has proposed a 10% private placement (subject to EGM). Based on an illustrative price of RM1.53, the placement is expected to raise RM515.35m, to be used for debts repayment, capex and working capital. This is the group’s second private placement in the year (first was in May and oversubscribed 1.5x). We are neutral on this, seeing this necessary to fund upcoming ventures while maintaining its net gearing level. Maintain OP with lowered TP of RM2.50.

10% private placement. SERBADK had proposed to undertake a private placement of 10% of the existing total number of issued shares, at a later-determined price. The private placement would require the approval of: (i) shareholders via an EGM, and (ii) Bursa Securities. Barring any unforeseen circumstances and subject to all required approvals being obtained, the proposed private placement is expected to be completed by 1QFY21.

Utilisation of proceeds. Based on an illustrative price of RM1.53 per placement share (20% discount from yesterday’s close), the private placement is expected to raise gross proceeds of RM515.35m. Of the funds raised, (i) RM100m will be used for partial repayment of bank borrowings, (ii) RM100m for capex for the Teluk Ramunia yard, (iii) RM303.46m for working capital, mainly for the EPCC of its Abu Dhabi Innovation Hub and Data Center projects, and (iv) RM11.89m for related expenses.

Reduced borrowings and interest expenses. The planned RM100m borrowing repayment represents ~2.6% of the group’s total borrowings, and is expected to result in interest savings of RM4.27m per annum (based on assumed interest rate of 4.27%). However, its net-gearing level will remain mostly intact at 0.9x as currently.

Prospects of the Teluk Ramunia Yard. Acquisition of the Teluk Ramunia Yard was completed in September 2020 at a price of RM320m. Via the yard, SERBADK is seeking to venture into upstream oil and gas activities, enabling the group to provide services such as decommissioning works, offshore transportation and installation, integrated hook-up and commissioning, top side maintenance etc. This puts them in direct competition against other upstream contractors e.g. DAYANG, SAPNRG and MHB (refer to our initial report on the acquisition dated 15 June 2020). The RM100m capex raised via the private placement will be used for the revival of the yard, restoring its operational capacity of 50k tonnes. This includes the construction of building facilities and purchase of heavy machinery.

Working capital to be used for Abu Dhabi projects. Of the RM303.46m working capital raised from the private placement: (i) 55% is expected to go into the Abu Dhabi Innovation Hub project, (ii) 35% for the Abu Dhabi Data Centre project, and (iii) remainder 10% for general working capital. The Abu Dhabi Innovation Hub and Data Centre projects (awarded back in April 2020 and August 2020, respectively – refer to our reports dated 16 April 2020 and 7 August 2020 for further details) carry contract values of RM7.7b and RM1.5b, respectively. Combined, these two projects constitute roughly half of the group’s RM18.5b order-book. Needless to say these projects are massive undertakings for the group, and thus, would necessitate a high working capital requirement.

Will the private placement lead to an overhang? This represents the second private placement for the group within the year. The first private placement (also for 10%, completed in May 2020) managed to raise gross proceeds of RM456.7m, and was oversubscribed by ~1.5x in just one day after the official initial announcement on 23 April 2020 (refer our report dated 24 April 2020). This was despite being in the peak of the oil price slump, as well as lockdowns measures, back in April-May 2020. With sentiment returning to the sector, coinciding with the recovery of oil prices, we see it likely for this round’s placement to be also well subscribed.

Will there be further equity fund raising? With all of its major upcoming ventures (e.g. Teluk Ramunia yard, Abu Dhabi projects) being adequately funded, and its net-gearing currently below the 1.0x threshold, we see it less likely for the group to embark on another fund raising exercise at least for the next few months.

Maintain OUTPERFORM. Our TP is lowered to RM2.50 (from RM2.75), after factoring in the enlarged share base arising from the private placement, based on unchanged valuation of 15x PER on FY21E EPS.

Overall, we are neutral on the private placement, seeing it as a necessary step for the group to meet upcoming capital requirements to fund its ventures, while at the same time maintaining its net-gearing levels below the 1.0x threshold. Nonetheless, we expect the placement to be well subscribed, and should not significantly erode the group’s ROE. We continue to like SERBADK given its superb track record of earnings growth delivery.

Risks to our call include: (i) lower-than-expected order book replenishment, (ii) weaker-than-expected margins, (iii) geopolitical unrest in the Middle-East affecting oil and gas-related activities, and (iv) undersubscription of its private placement.

Source: Kenanga Research - 9 Dec 2020