Investment Highlights

• We maintain our SELL call on Serba Dinamik Holdings (Serba) with an unchanged sum-of-parts-based (SOP) fair value of RM1.05/share, based on a 30% premium to its FY19 book value.

• Serba announced that the group has received a letter of award for a massive US$1.8bil (RM7.7bil) contract to design, engineer, procure and construct an innovation hub, academic campus, related facilities and IT infrastructure over 4 years in Abu Dhabi, the UAE from a special-purpose vehicle, Block 7 Investments LLC which we understand is owned by a prominent UAE person.

• The scope involves: (i) an innovation hub which includes offices, restaurants, exhibition centres and IT centres; (ii) academic campus; and (iii) accommodation which includes apartments and hotels, over a total build-up area of 455,000 sq metres. We would not be surprised if Sarawak Consolidated Industries, which is 48% owned by Serba’s founder/major shareholder Datuk Mohd Abdul Karim, could be involved as a sub-contractor at a later stage.

• The project forms part of Block 7’s initiatives to create a global incubator and landmark for the advancement of innovators for the technology, property, financial and energy sectors in Abu Dhabi.

• Including the order wins of RM321mil announced on 4 February this year, this huge contract will drive up Serba’s order wins to RM8bil – already reaching 80% of the group’s implied FY20F new wins of RM10bil based on FY20F outstanding order book target of RM15bil.

• Assuming a pretax margin of 10%, we estimate that this EPCC project could increase FY21F–FY22F earnings by a substantive 24%–27%, with construction likely to commence early next year. However, a project of this scale could stretch the group’s balance sheet as we estimate that Serba would need working capital of up to RM700mil to initiate this project based on a 20% construction phase.

• This could drive up the group’s FY20F net gearing from 0.9x to an uncomfortable 1.2x, under the current dismal global outlook when financial institutions are increasingly wary of oil & gas funding.

• As such, until this project has achieved financial close by the client, we maintain Serba’s FY20F–FY22F earnings for now. The potential equity placement of up to 10%, which has been earlier approved by its AGM, may not be sufficient for the group’s requirements due to the recent share price drop. Hence, despite its recurring income profile, the group’s high net gearing has led to a low FY20F PE of only 8x vs. its closest peer Dialog Group’s 28x.

Source: AmInvest Research - 16 Apr 2020