SERBADK posted its worst ever quarterly results, with earnings of merely RM15m. Notably, the group’s short-term borrowings have also ballooned up to RM1.7b during the quarter. With its operating cash flows still in the negative, coupled with the downgraded credit ratings amidst lack of funding access for a needed refinancing, we believe the group may be facing real borrowings risks. Meanwhile, we are still awaiting updates on the special independent review report by EY, as well as its fully audited accounts. Given all the uncertainties, the stock remains UNDER REVIEW.

FY21 below expectations. SERBADK posted 18-month FY21 core net profit of RM760m (company had previously changed its financial year- end from December 2020 to June 2021). This is below expectations, coming in at only 85% of our full year earnings forecasts – dragged by poorer revenue, especially from its O&M segment, coupled with gross margins deterioration and higher administrative expenses. No dividends were announced, as expected.

Worst ever quarterly results. SERBADK posted its worst ever quarterly results, with 6QFY21 core net profit of merely RM15m – representing 87%/90% QoQ/YoY deterioration. The stark drop in earnings was mainly attributable to: (i) poorer revenues, especially from its O&M and ICT segments, (ii) margins deterioration in its O&M and EPCC segments, and (iii) higher administrative expenses.

Possible balance sheet and corporate governance risks. Notably, the group’s short-term borrowings have ballooned up to RM1.7b (as compared to RM401m as at end-FY19), with its net-gearing currently at 0.9x. With its operating cash flows still in the negative, we believe the group is now facing real borrowings risks. The group’s credit rating had faced widespread downgrades earlier – citing the group’s difficulties to access fundings necessary for refinancing. Meanwhile, we are still awaiting further updates on the group’s special independent review report by EY, as well as its fully audited accounts, to put some certainty over the status of the group’s corporate governance.

UNDER REVIEW. Amidst uncertainties with the veracity of its accounts and going concern status, the counter remains UNDER REVIEW until the situation is fully resolved.

As a reference, current trough valuations within the local oil and gas universe are at approximately 0.2-0.3x PBV (e.g., SCOMI, SAPNRG, REACH). Should we apply this distressed valuation onto SERBADK, we would arrive to a hypothetical fair value of RM0.24-0.35 (based on FY22E numbers).

Post results, we slashed FY22E earnings by 26%, accounting for weaker job flows and margins, while simultaneously introducing new FY23E figures. Given the group’s current need for capital preservation, we are not expecting the group to pay out any dividends moving forward (as compared to a pay-out ratio of ~33% in prior years).

Source: Kenanga Research - 30 Sep 2021