Review

• Serba Dinamik (Serba)’s 9M19 core net profit of RM349mn (+24% YTD), was within our expectations and consensus’, - accounting for 77%/74% of full-year estimates respectively.

• YTD earnings trend remained largely intact, whereby expansion was mainly driven by the O&M segment – comprising MRO (Maintenance, Repair & Overhaul) business across all countries except for Saudi Arabia and Turkmenistan. 9M19 revenue contribution from the Mid-East tapered off to 61% (9M18: 64%) as the Group diversified to new markets (i.e. India and Uzbekistan) in Central & South Asia. Meanwhile, the EPCC segment also fared well – driven by the chlor-alkali project in Tanzania and New Thunder contract in UAE. Lastly, we note that IT services (i.e. customized software solutions at Qatar and India) is gaining traction - as evident from a 6.5x surge in 9M19 EBIT contribution from the Others segment.

• The above more than offset a more than 2-fold YTD expansion in finance costs, as well as higher depreciation and taxes. Recall that the latter was due to the change in Labuan’s tax rate to 3% (previous: RM20k p.a.) as gazetted under Malaysia’s 2019 Budget.

• QoQ, bottomline was weaker (-21% QoQ) due to reduced contribution from all segments: (1) O&M: reduction in activities due to seasonality - particularly in Saudi Arabia and Malaysia, (2) EPCC: lower recognition from projects in Tanzania and UAE, and (3) IT: lesser activity. This more than offset a 3.4x jump in contribution from associates. However, we understand that the latter was due to one-off chunky recognition (circa RM4mn-6mn) from associates other than CSE Global.

• Serba declared a lower 3rd interim DPS of 1.1sen (3Q18: 1.7sen), bringing the 9M19 cumulative DPS to 6.1 sen, higher than 5.7sen for 9M18.

Impact

• Maintain earnings forecasts.

Outlook & Valuation

• The Group’s orderbook currently stands at circa RM10bn (O&M: 60%, EPCC: 40%) which implies a strong earnings visibility of 2-3 years. As such, management is confident of maintaining its annual growth target of 15%-20% bottom line expansion in FY20. This is underpinned by its ambitious goal of 50% orderbook expansion to RM15bn by end-FY20.

• The Group is aggressively marketing its new smart maintenance systems and applications. The latter is currently applied in Serba’s contracts with Petronas, as well as Indonesian projects. Moving forward, Serba aims to expand this service to new markets (Middle East and Central Asia) and sectors (e.g. power generation and facility management).

• Other catalysts for Serba include major capacity expansion plans at Pengerang Integrated Development (PID) (GDC: RM1.8bn). This follows after the start-up of its new RM259mn Bintulu Integrated Energy Hub (BIEH) in 1Q20. Additionally, the PID project will also catalyse Serba’s diversification to real estate. Correspondingly, management guided for 20% YoY capex expansion in FY20.

• Maintain Buy on Serba with unchanged target price (TP) of RM5.00 based on 15x CY20 P/E.

Source: TA Research - 26 Nov 2019