Investment Highlights

• We upgrade our call on Serba Dinamik Holdings (Serba) to BUY from SELL with a higher fair value of RM2.20/share (from an earlier RM1.05/share), based on a 30% discount to our diluted sum-of-parts (SOP) valuation of RM3.15/share vs. a previous P/BV target of 1.3x.

• Our FY19F–FY21F forecasts are maintained as Serba’s 1QFY20 net profit of RM134mil came in within both our and street’s expectations, accounting for 23% of our and consensus’ FY20F earnings. As a comparison, 1Q accounted for 23%–25% of FY17–FY19 net profits.

• The group declared a first interim dividend of 1.2 sen (-48% YoY), translating to a payout ratio of 28%, in line with Serba’s minimum policy of 30%.

• Serba’s 1QFY20 net profit rose 19% YoY in tandem with a 30% revenue rise to RM1.3bil, underpinned by both the operation and maintenance (O&M), and engineering, procurement and construction (EPCC) segments. Net interest costs halved to RM50mil, as 4QFY19 posted early sukuk redemption charges.

• The YoY group revenue growth stemmed from the O&M segment (+29%), and to a lesser extent, the EPCC division (+27%) benefiting from the construction of the US$78mil Tanzanian chlor-alkali factory and Petronas Carigali’s jobs.

• Geographically, this growth was largely driven by operations in the Middle East region (+36% YoY), followed by Malaysia (+25%) that caused the Middle Eastern share of revenue to rise to 62% from 59% in 1QFY19.

• Serba’s outstanding order book has surged by 59% QoQ to RM17bil currently from the massive US$1.8bil (RM7.7bil) Innovation Hub property development project in Abu Dhabi, already exceeding its FY20F year-end target of RM15bil.

• QoQ, Serba’s net profit decreased seasonally by 5% in tandem with a 6% revenue decline. For QoQ comparison, 1QFY17 and 1QFY18 revenues dropped by 16% and 9% respectively.

• Following the fresh placement of 10% of the group’s share capital last month, Serba’s FY20F net gearing has improved from a high 0.9x to a more comfortable 0.6x. While this could rise towards 0.8x by FY21F with the additional working capital requirement of up to RM500mil with the progressive construction of the huge Abu Dhabi project, we do not discount another equity-raising exercise next year.

• Nevertheless, Serba’s recurring income profile together with lower balance sheet risks translate to a low FY20F PE of only 11x vs. its closest peer Dialog Group’s 30x.

Source: AmInvest Research - 21 May 2020