SERBADK announced that its external auditors, KPMG, had flagged some matters pertaining to statutory audit. As such, the group is currently in the midst of appointing an independent firm to commence a special independent review. The emergence of this issue has created uncertainties over the reported financial statements. As such, we recommend investors to avoid the name for the time being, and wait for further announcements as the situation develops. Downgrade to UP (from OP), TP of RM0.95.

Matters pertaining to statutory audit. SERBADK announced that its

external auditors, KPMG, have flagged some matters pertaining to statutory audit. As such, the group is currently in the midst of appointing an independent firm to commence a special independent review to assess the veracity and accuracy of the matters.

In line with the change in financial year end. Recall that earlier in

the month, the group announced that it has changed its financial year end to June 2021, from December 2020, as according to management, it did not manage to finalise its audited accounts on time, the audit process hampered as it were, by the movement restrictions globally, coupled with the implementation of the MCO in Malaysia.

What does this mean? From what we gathered, the external auditors

of KPMG met with some issues pertaining to the group’s operational procedures. To address these issues, the group is currently in the midst of appointing an independent firm (likely another audit firm) to conduct a special review on these matters.

What is the best and worst case scenario? Best case scenario, the

external auditors will be satisfied with the independent review and management’s compliance to the inquest and sign off the upcoming FY2021 (June) audited accounts. However, in the worst case scenario, should the auditors uncover any discrepancies, we believe a qualified audit report could be possible.

Downgrade to UNDERPERFORM (from OUTPERFORM). The

emergence of this issue has created some uncertainties over the group’s reported financial statements. As such, we recommend investors to avoid the name for the time being, and wait for further

announcements as the situation develops. Our TP is lowered to RM0.95, pegged to floor valuations of 5x PER on FY22E at -3SD below its mean (from RM2.80 at 15x PER, previously).

Risk to our call: (i) an unqualified report from its external auditors.

Source: Kenanga Research - 27 May 2021