What Happened?

• Serba proposed the following exercises:- (1) Share Split: Subdivision of every 2 existing shares into 3 shares (2) Bonus Issue: 2 bonus shares for every 5 subdivided shares (3) Free Warrants: 2 warrants for every 5 subdivided shares

• This exercise is expected to be completed by 4Q19, after securing relevant approvals. The latter includes the green light from shareholders at an EGM.

• Post-completion of the share split and bonus issue, Serba’s share base (Figure 1) will expand by 2.1x to 3.1bn shares (current: 1.5bn shares). Assuming the free warrants are exercised, Serba’s fully-diluted share base will amount to 4bn shares, which implies 2.7x of existing base.

• Assuming the exercise price of warrants (tenure: 5 years) is RM2.45 (30% premium over ex-all price: RM1.97), this is expected to raise proceeds amounting to RM2.26bn. This will boost Serba’s share capital to RM3.6bn (current: RM1.34bn) and reduce gross gearing from 0.9x to 0.4x. Future proceeds from the warrants shall be utilized for:- (1) working capital and other expenses (e.g. employee marketing), and 2) repayment of debt.

Our Take

• Post-completion of (1) & (2), our current target price of RM5.00 (based on 15x CY20 P/E) will be reduced to RM2.39 (Figure 2). This represents a 22% upside to theoretical ex-all price (TEP) of RM1.97. Meanwhile, following full completion of all 3 exercises, this results in 11% EPS dilution. The latter is assuming all warrants are exercised concurrently and interest income (rate: 3.1% p.a.) is derived from the proceeds. Correspondingly, our fully-diluted TP will be lowered to RM2.13 (8% upside from TEP).

• We are positive on this exercise, given the following benefits- (1) improves share liquidity, (2) future proceeds from warrants issuance is able to fund the Group’s business growth without stretching its gearing, (3) rewards existing shareholders, and (4) inconsequential FY20 fullydiluted EPS dilution assuming all warrants are exercised.

Impact

• Maintain earnings forecasts pending completion of this exercise.

Valuation

• Serba’s multi-year earnings growth is driven by:- 1) resilient demand for brownfield maintenance services, 2) diversification into stable recurring income via stake acquisitions for utilities business, 3) global client base, 4) expansion at RM259mn Bintulu Integrated Energy Service Hub (start: 2020), 5) major capacity growth and real estate ventures at RM1.8bn Pengerang Integrated Development (target completion: 4Q20-21), 6) robust orderbook of RM9.0bn that translates into strong earnings visibility (circa 3 years) and 7) steady traction in orderbook replenishment. Maintain Buy with unchanged target price (TP) of RM5.00 based on 15x CY20 P/E.

Source: TA Research - 3 Sept 2019