• 2Q20 core net profit of RM148m was ahead of our forecast driven by betterthan-expected ICT profit. Despite the continuous push back in EPCC recognition, higher O&M activities made up for the shortfall
• Raising our EPS by 2-8% to factor in higher maintenance activities and ICT segment profit contribution while excluding CSE Global associate contribution post recent disposal
• Maintain BUY and lift our target price to RM2.15 (from RM2.10). Serba is a sector top pick

6M20 Made Up 55%/50% of Our and Consensus Forecasts

2Q20 revenue grew 26% yoy mainly attributable to O&M segment growth (+26% yoy), while EPCC revenue was flat. Despite the recent crash in global oil prices, Malaysia, Qatar and UAE continued to record both yoy and qoq improvements. UAE’s

contribution grew from 25% in 1Q20 to 29% of total revenue on the back of higher upstream and downstream activities. Qatar’s revenue remained stable at 26% (1Q20: 25%) of the group’s revenue with activities remaining robust. The number of contracts serviced in Qatar remained similar at 15. Malaysia’s O&M activities were stable with revenue growing by 3% qoq, despite the contribution falling to 27% (from 30% in 1Q20).

ICT profit jumped 2.4x qoq to RM15m on the back of a 2.3x growth in revenue driven by contracts in Indonesia, India and Middle East. Associate losses widened from RM1.2m in 1Q20 to RM7.6m, dragged down by a RM2m profit reversal from Singapore listed CSE Global, which Serba recently disposed, and RM4m of losses from multiple associate companies as activities were affected due to COVID.

Stocking Up Inventories to Ensure No Operation Hiccups

Serba has spent a higher RM240m to stock up on inventories in 2Q20 as the group is concerned over a potential new wave of outbreaks which might potentially disrupt its existing operations. We gather that this will not affect margins, but neither will Serba benefit from potential further margin improvement, in the event equipment prices fall.

Reiterate Buy

We raise our 2020 EPS by 8% to factor in: 1) better-than-anticipated maintenance activities, 2) higher ICT profit, offsetting 3) loss at CSE Global. We also raise our 2021- 22E EPS by 2-3% for similar reasons. We raise our target price to RM2.15 (from RM2.10), based on 12x FY21 EPS and reiterate our Buy call as we continue to like Serba for its defensive business model in the maintenance space, good track record in securing contracts (current order book: RM18.5bn) amid a low oil price environment and attractive 10x forward valuation.

Source: Affin Hwang Research - 26 Aug 2020