Summary

• Serba Dinamik Holdings Bhd (Serba Dinamik) and Huawei Technologies (M) Sdn Bhd have formed a partnership to drive digital transformation in urban and rural Malaysia. Both signed a memorandum of understanding (MOU) which marks the start of the partnership to develop digital solutions via the adoption of Huawei Cloud and Artificial Intelligence (AI) technology.

• The MOU aims to bring about digital transformation of the oil and gas industry, innovative IT solutions on cloud and to reach the unreached by digitally enabling those in rural areas, as well as to look into setting up smart industry areas in Sarawak and Johor. The partnership aims to build smart campuses and a digital industry in Malaysia. The digital industry will include a platform for education, smart living ecosystem and automation for manufacturing, according to the companies.

• We view the collaboration as a positive move for Serba Dinamik with the opportunity tap into Huawei Technologies technical capabilities in the technology space. In the meantime, the move is also in line with the country focus to encourage the adoption of digitalisation under the 4th Industrial Revolution (IR 4.0). The move is time as the Covid-19 pandemic has proven that digitalisation and automation is a necessity to ensure business sustainability.

• Serba Dinamik also aims to build their ICT business as part of their business strategy to reduce the reliance on the oil & gas (O&G) business segment. With the oil & gas business currently making up to >90.0% of total revenue, Serba Dinamik aims to gradually reduce revenue contribution from the O&G segment ~50% of total revenue over the next 3 years.

• Digital transformation will be earnings accretive for Serba Dinamik in the long run, premised to the rising demand for businesses across various sectors aiming to improve operations efficiency. Meanwhile, we expect the extended downturn in oil & gas sector to remain unsettled over a longer term period despite relevant parties’ efforts to bridge the supply-demand imbalances.

Valuation & Recommendation

• We made no changes to our earnings forecast as we deem that the potential collaboration is still at infant stage and has yet to contribute to Serba Dinamik’s earnings. Consequently we maintain our BUY recommendation on Serba Dinamik with an unchanged target price RM2.41. Our target price is derived by ascribing an unchanged target PER of 13.0x to its revised FY21f EPS of 18.5 sen.

• We continue to like Serba Dinamik as one of the key players in the oil & gas industry, backed by its sturdy orderbook comprising of dozens of jobs from local and overseas that will provide long-term earnings visibility, coupled with the group’s on going effort diversification into businesses that generates recurring income.

• Risks to our recommendation include failure to hit the targeted outstanding orderbook of RM16.20bn by end-FY20. Meanwhile, a firmer ringgit against the USD could affect the group’s bottom line as it will have a negative impact on the group’s earnings and vice versa with majority of existing orderbook derived from overseas.

Source: Mplus Research - 28 Sept 2020