Serba reported 4Q20 core profit of RM171m (+16.8% QoQ, +21.1% YoY) bringing FY20’s sum to RM595m (+20.3% YoY), coming in within our/consensus’ expectations, at 103/102% of full year estimates. We opine that Serba is still expected to record strong earnings going forward despite the volatility and challenges in the O&G industry due to its strong and sustainable earnings from its O&M segment. Its earnings growth in FY21-22F is expected to be underpinned by its large EPCC orderbook of c.RM8.8bn and its c.RM2.2bn ICT orderbook while its O&M orderbook of RM7.7bn (recurring) is expected to provide a strong and sustainable base. Maintain BUY with TP of RM2.30 based on 13.5x FY21 EPS.

Within expectations. Serba’s 4Q20 core profit of RM171m (+16.8% QoQ, +21.1% YoY) and FY20’s sum of RM595m (+20.3% YoY) came in within our/consensus’ expectations, constituting 103/102% of full year estimates. Core profit was derived after excluding RM17.2m of forex gain and a one-off gain from its repurchase of its Sukuk programme.

Dividend. An interim dividend/share of 1.65 sen was declared for the quarter (vs 1.40 sen SPLY); ex-date: 16 Mar 2021, bringing FY20 dividend/share to 5.45sen (SPLY: 4.17sen / share).

QoQ. Core profit was up 16.8% due to higher contribution from its O&M business in Malaysia as work activities rose in the quarter from its backlog carried over from 2Q20 and 3Q20.

YoY. Core profit was up 21.6% primarily due to higher O&M and EPCC orderbook as O&M and EPCC earnings were up 14.6% and 30.1% respectively.

YTD. Profit was up 20.8% YoY due to higher orderbook backlog of RM18.7bn (vs RM10bn orderbook in 2019).

Outlook. We believe that the recent private placements from Serba would be able to strengthen its balance sheet to secure more projects in the future and we believe that Serba has the potential to win more EPCC projects from UAE and Saudi Arabia. Our channel checks suggest that Serba is currently bidding for 3 EPCC projects from Abu Dhabi and 1 EPCC project from Saudi Arabia with a total contract value of c. USD1bn. We also foresee exponential earnings growth for Serba in FY22 when its RM7.7bn Block 7 project reaches its peak earnings phase and we believe that the Company’s balance sheet will improve significantly when it reaches the tail end of its Abu Dhabi data centre and innovation hub project in 2023 and this would enable Serba to secure more EPCC projects in the future without using equity as a means of financing.

Forecast. No Changes.

Maintain BUY with TP of RM2.30 based on 13.5x FY21 EPS. We maintain our BUY call on Serba as we believe that (i) it would be able to maintain its high EBIT margins for its O&M division, (ii) the recurring nature of its O&M orderbook would ensure earnings sustainability in the foreseeable future, (iii) earnings are expected to grow exponentially in FY22 when its Block 7 project hits its peak earnings phase (iv) its cleaner balance sheet would allow the Company to take on more projects in the future and (iv) no further private placements are expected to be carried out for data centre and Block 7 project.

Source: Hong Leong Investment Bank Research - 8 Mar 2021