Serba Dinamik Holdings Bhd
(June 19, RM4.04)
Maintain buy with an unchanged fair value (FV) of RM6.50: We maintain our “buy” call on Serba Dinamik Holdings Bhd with unchanged forecasts and a sum-of-parts-based FV of RM6.50 per share, which implies a financial year 2019 forecast (FY19F) price-earnings (PE) of 20 times — 33% below Dialog Group Bhd’s 30 times, the company’s closest peer in Malaysia. Serba secured six contracts to undertake operation and maintenance (O&M) services together with a job to provide engineering, procurement, construction and commissioning (EPCC) work for Pavilion Qatar Engineering Co WLL, Petronas Chemicals Fertiliser Sabah Sdn Bhd, Petroliam Nasional Bhd, Malaysia Refining Company Sdn Bhd, Malaysia LNG Sdn Bhd, Kebabangan Petroleum Operating Company Sdn Bhd and PC Myanmar (Hong Kong) Ltd.

As the O&M contracts are on a “call out” basis with no specific value, the group was only able to provide the estimated value of US$60 million (RM251 million) for the contract to provide repair, overhaul and maintenance of pumps, compressors, gearboxes and other rotating equipment for Pavilion Qatar Engineering. Based on the value of contracts which Serba has estimated to have secured since the beginning of this year, the RM699 million which has been announced to date account for 18% of the group’s FY19F revenue and raises its outstanding order book by 5% from RM8.3 billion as at the first quarter (1Q) of FY19 to RM8.7 billion currently, of which O&M accounts for 74% and EPCC 26%. Including the multiple O&M jobs which the management has not been able to provide any guidance on estimated values, we believe that Serba remains on track to reach the management’s outstanding order book target of RM10 billion by end-FY19F.  This implies an impressive order book growth of 33% year-on-year and a potential FY19F revenue growth of 18% to 20%, which is above our conservative assumption of 16%. The management expects the continuation of strong revenue growth this year, driven by growing demand in the Middle East and Southeast Asia, spearheaded by the United Arab Emirates and Qatar.

Our only concern lies in the rising net gearing of 0.5 times as at 1QFY19 from 0.3 times in 1QFY18 due to the group’s expansion programme, which the management affirms does not require any equity-raising exercises. We remain “positive” on Serba’s O&M business model, which is still actively expanding its long-term recurring earnings profile by strategically leveraging its EPCC and ownership platform. — AmInvestment Bank, June 19