Serba Dinamik reported lower core net profit of RM113.3m in its 5QFY21 results, dropping 15.3% as compared to the same period last year, attributable to lower recognition in the EPCC segment with revenue and gross profit declining by 29.4% and 34.7% YoY respectively due to slower activities in Malaysia and the UAE. Gross profit margin for the segment dropped 1.2ppt YoY. While the Group reported a reasonable set of results, negative sentiment on the stock continues to cloud, with increasing focus on governance-related issues. While we make no comment on its public spat with its former external auditors KPMG which may or may not have its merits, we are troubled at the recent resignations of its independent directors due to differences in opinion. We make no changes to earnings at this juncture, though we change our valuation methodology from earnings-based to book value-based to guard against potential uncertainties ahead. We apply a discount of 50% to its trailing 12-month book value of 0.88 and derive our new TP of RM0.44 (from the earnings-based RM1.39 previously). While we maintain our call at Neutral, we continue to suggest investors stay sidelined in the interim given the uncertainties ahead.

• Results highlight. The Group’s 5QFY21 net profit dropped 37.8% QoQ to RM113.3m, in tandem with the lower revenue by 23.8% QoQ due to lower contribution by all segments. The performance was mainly due to slower activity in Malaysia (-40.5% QoQ) given the recent movement control order imposed. Slower activities were also seen in Indonesia (-50.1% QoQ), UAE (-31.4% QoQ) and Qatar (-20.3% QoQ). Overall, gross profit margin is stable at 17%, though net profit margin dropped 1.8ppt, dragged by the higher finance cost.

• View and valuation. While management has reiterated that business is as usual despite the on-going statutory audit issues, concerns over corporate governance-related issues may continue to cloud until this issue is addressed convincingly. Recent resignation of its external auditor, KPMG, is understandable given the lawsuit against it. Resignation of its independent directors due to differences in opinion is troubling however. We revise our valuation methodology for the stock by pegging a discount of 50% to its December 2020 book value (trailing FY20 period) of RM0.88 and hence, derive our new TP of RM0.44. Recent share price weakness may continue to persist in light of ongoing concerns. We continue to suggest investors remain sidelined at this juncture despite relative attractiveness from a forward-earnings standpoint.

Source: PublicInvest Research - 28 Jun 2021