SERBADK has had announced; (i) a 15% acquisition of GSH for RM17m, which would allow SERBADK to increase its EPCC capabilities and tap into new markets, and (ii) RM269m maiden EPCC in Laos for two hydropower stations. BUY with TP of RM3.95 pegged to 15.0x FY18E PER. We continue to like SERBADK for: (i) its decent earnings growth of 25-13% in FY18-19 backed by both O&M and EPCC segments via geographical expansion, (ii) stable margins of 11.7- 11.2%, and (iii) superior ROE of 19-18%. 

GSH's core business is power generation from two biogas power plants (built from proprietary technology) where treated biogas from palm oil effluents are used to generate electricity to be sold to TENAGA. GSH also does EPCC works for wastewater treatment plants and consultancy services within the renewable energy space. This acquisition would put SERBADK as a frontrunner for GSH's remaining eight biogas power plant projects (with total contract value of c.RM160m) around Malaysia. Note, GSH has awarded SERBADK the EPCC works for their 3rd biogas plant located at Teluk Intan (Perak) back in February 2018. Post-acquisition, SERBADK's net gearing will rise marginally to 0.07x (from 0.06x). Based on GSH's FY16 earnings of RM10m, we find the acquisition price tag fair as it implies 11 x PE, which is at a discount to SERBADK's current multiple of 14x. 

The new EPCC contract in Laos worth RM268.8m (USD66.2m) from Nam Taep 1,2,3 Hydropower Company Ltd. The EPCC scope comprises works for Nam Taep 1 and 2 hydropower stations, which are capable of generating 30MW of energy slated for completion within 43 months. This marks SERBADK's first contract in Laos, which showcased their ability to secure contracts in new markets. 

SERBADK's YTD wins of RM1.6b (outstanding order-book RM6.9b) is in line with our FY18 replenishment assumption of RM3.0b. Margins-wise, we reckon that the job should match its historical GP margins of c.17% for EPCC works. 

Source: Rakuten Research - 20 Jul 2018