We are anticipating yet another record breaking quarter for SERBADK, with its upcoming 4QFY20 to post core PATAMI of >RM150m. Meanwhile, cash flows are expected to improve in FY21, in tandem with order-book recognition, while net-gearing is expected to lower to ~0.6x (from ~0.9x currently) post completion of its private placement. With only ~40% of its order-book exposed to the oil and gas sector, we see no reason for the company to not continue its consistent track record of earnings growth. Reiterate OUTPERFORM, with TP of RM2.50. Current price level represents a bargain entry point, with the stock trading at <10x PER.

Expecting another record breaking quarter in 4QFY20. Based on SERBADK’s seasonally strong 4Q, coupled with the group’s work order flow trend, we are anticipating its upcoming 4QFY20 to post yet another record breaking earning of >RM150m in core PATAMI (versus RM148m in 3QFY20, and RM141m in 4QFY19). This means that the results which are due to be released by end-Feb 2021 are highly likely to exceed our earnings expectations.

Cash flow and balance sheet to improve in FY21. Throughout last year, the group saw tremendous order-book growth, from ~RM10b in the start of the year to ~RM18.7b currently. Naturally, working capital requirements for these new projects had resulted in mild stagnation of its cash flows in FY20. However, as these projects are expected to significantly start works in FY21, we highly believe cash flows should improve going forward, in-line with order-book recognition. Meanwhile, the completion of the current private placement is also expected to improve its balance sheet, with net-gearing lowered to ~0.6x, from currently ~0.9x.

No signs of slowing down. Overall, we see no reason for the company to not continue its consistent track record of earnings growth delivery. Despite the Covid-19 pandemic and low crude oil prices, SERBADK rose to the occasion to meet high earnings expectations in FY20, reflecting the resiliency in its earnings growth. With only ~40% of its current order-book derived from the oil and gas sector, we see ample opportunity of continued growth for SERBADK across various engineering sectors going forward.

Reiterate OUTPERFORM, with unchanged TP of RM2.50, pegged to PER of 15x on FY21E EPS. No changes to our FY20-21E numbers for now, but we highlight the high possibility of earnings upgrade post- 4QFY20 results.

Current price level serves as a bargain entry point, and easily inspire an OUTPERFORM call, with the stock currently trading at <10x PER despite its strong earnings prospect. All things considered, we believe the stock is due for a rebound.

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) project execution delays.

Source: Kenanga Research - 2 Feb 2021