SERBADK’s 1QFY22 results completely missed expectations, posting its first ever quarterly loss. With the group’s outlook and corporate governance status remaining uncertain, and coupled with the stock still being under suspension since 22 Oct 2021, we CEASE COVERAGE on the counter for the time being.

1QFY22 results completely missed expectations. SERBADK reported 1QFY22 core net loss of RM42m – completely missing expectations against our full-year profit forecast of RM474m and consensus of RM359m, due to slow job flows and margins deterioration in both its core segments of operation and maintenance (O&M), and engineering, procurement construction and commissioning (EPCC). No dividends were announced, as expected.

First ever quarterly loss. QoQ, 1QFY22 plunged into losses, from a profit of RM15m, mostly dragged by poorer job flows and margins deterioration, especially for its O&M segment. Similarly, on a YoY- basis, 1QFY22 plunged into losses from a profit of RM148m, due to poorer job flows and margins deterioration in O&M and EPCC.

Status of corporate governance still in question. With the company currently in litigation against its former auditors KPMG, its appointed special independent review Ernst & Young, as well as Bursa Malaysia, we believe questions revolving around the group’s corporate governance could still persist. We also believe conclusive outcomes from its special independent review report and its audited annual report are the most resolute way of putting these uncertainties to rest. However, last week, the group had also announced that it is unable to finalise its audited financial statements in a timely manner before the due date of 30 Nov 2021, with Bursa also rejecting its second extension of time application. Additionally, any failures to meet debt repayment obligations, especially its coupon payments for its USD300m sukuk, reportedly due May next year, will put the group’s balance sheet into further risk.

CEASE COVERAGE. Given the counter’s uncertain outlook, and coupled with the stock being under suspension since 22 Oct 2021, we are ceasing our coverage on the stock for the time being. Should outlook turn more positive, we are open to revisiting our call on the stock.

Post results, we cut our FY22E/FY23E CNP by 68%/62% after factoring in weaker job flows and poorer margins assumption.

Source: Kenanga Research - 1 Dec 2021