SERBADK was awarded five new contracts (three ICT jobs in India, one O&M job in Indonesia, and one O&M job in Malaysia), amounting to a guesstimated ~RM425m. We are positive on the new wins, especially on the new ICT contracts, marking the group’s commitments to further expanding into this segment. The new wins bring the group’s order-book to RM18.9b (of which ~60% is non-oil and gas). Maintain OUTPERFORM, with TP of RM2.80. The stock is currently trading at a bargain valuation of <10x PER, despite its strong earnings prospects, and is one of our TOP PICKs for the sector.

Five new contract wins. SERBADK announced four new overseas contracts – three ICT jobs in India, and one O&M contract from Indonesia, combined to be worth approximately USD99.6m (or ~RM408.8m). Additionally, the group also secured one O&M contract locally from Malaysia LNG Sdn Bhd with no specific value as it is on a “call-out” basis (i.e. the work orders will be awarded at the discretion of the client based on their activities’ schedule and rates). Nonetheless, we guesstimate the local contract to be worth roughly RM16m, bringing the combined values of the five contracts to a total of ~RM425m.

Positive on the new contracts. We are undoubtedly positive on the new contract wins, displaying SERBADK’s competitiveness in its ability to continue securing new contracts. Additionally, we are also further encouraged by the increased number of ICT jobs – with this being one segment that the group has identified for huge growth potential. As at FY20, ICT contributions to the group are still relatively small, contributing ~6% to gross profit. For the new contracts, we expect gross margins to be around the high-teens, in-line with the company’s historical average.

Strength in order-book. This marks the group’s second contract win announcement in FY21, bringing YTD wins to ~RM980m and orderbook to RM18.9b, of which ~60% is derived from non-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 its earnings stream.

Maintain OUTPERFORM, with unchanged TP of RM2.80, pegged to 15x PER on FY21E EPS. No changes to our FY21-22E numbers as the contract wins are deemed to be still within our FY21E order-book replenishment assumption of ~RM11b.

We believe current price levels serve as a superbly attractive bargain entry point, and easily inspire an OUTPERFORM call, with the stock currently trading at <10x PER despite its strong earnings prospects. Additionally, we are also imputing a very conservative earnings growth of 10% for FY21E/FY22E, versus its historical trend of >25% growth.

The stock is also one of our TOP PICKs for 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 - 10 Mar 2021