Serba reported 5QFY21 core profit of RM113m (-33.9% QoQ, -14.4% YoY) bringing 15MFY21’s sum to RM707m, coming in within our expectations, at 78% of full year estimates. We opine that the recent 2 key developments, namely, suing KPMG and resignation of 5 of its independent directors may create a perception issue towards Serba. As such, we reckon these recent developments will possibly continue to exert selling pressure on the stock while buying interest is unlikely to resurface until its audit issues are resolved. Hence, we downgrade the stock from Hold to SELL at TP of RM0.28 (from RM0.78) based on 0.3x (from 0.7x) 18MFY21 BVPS. To be on the prudent side, we also assume no dividends will be paid until the audit issues are resolved.

Within expectations. Serba’s 5QFY21 core profit of RM113m (-33.9% QoQ, -14.4% YoY) and 15MFY21’s sum of RM707m came in within our expectations, constituting 78% of full year estimates. Core profit was derived after excluding RM17.7m of forex gain and a one-off gain of RM20m from its repurchase of its Sukuk programme.

Dividend. None Declared (SPLY: 1.2sen / Share).

QoQ. Core profit was down -33.9% due to lower contribution from its O&M and EPCC business in Malaysia due to MCO 2.0.

YoY. Core profit was down -14.4% due to the same reasons mentioned above.

Perception issues from recent developments. We believe that the decision by Serba to take KPMG to court, along with the recent resignation of 5 of its independent directors would cause jitters. Recall that we previously commended Serba for hiring Masleena Zaid (previously held roles in CCM and SC) to the board as an independent director. However, Masleena was one of the 5 independent directors who resigned, after only serving for 2 weeks. We opine that this may create a “perception risk” as it is currently left with only 2 independent directors (Mohamed Illyas Pakeer: Independent Non Executive Chairman and Johan Ishak: Independent Non-Executive director). In light of the recent audit issues, we believe that Serba needs more independent directors in its board to bring more balance and improve the optics amongst investors. We expect that funds with stringent ESG guidelines may continue to disassociate themselves with Serba for the time being and this may cause further weaknesses to its already weak share price, which has already plunged by c.75% since its audit issues surfaced.

Forecast. No changes to earnings forecast. However, given the uncertainties surrounding its audit matters, we have decided to take the prudent path and assume no dividends will be declared until the issue is resolved.

Downgrade to SELL with TP of RM0.28 based on 0.3x 18MFY21 BVPS. We downgrade our Hold rating to a SELL at TP of RM0.28 (from RM0.78) based on 0.3x (from 0.7x) 18MFY21 BVPS. This is to reflect the 2 recent developments, notably (i) its decision to sue KPMG and (ii) resignation of 5 of its independent directors, both of which may bring perception risk to the company. In a nutshell, we believe these recent developments will possibly continue to exert selling pressure on the stock while buying interest is unlikely to resurface until its audit issues are resolved.

Source: Hong Leong Investment Bank Research - 28 Jun 2021