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This article first appeared in The Edge Financial Daily on December 14, 2017

Serba Dinamik Holdings Bhd
(Dec 13, RM3.12)
Maintain buy with a higher target price (TP) of RM4:
We recently hosted a non-deal roadshow for Serba Dinamik Holdings Bhd in Singapore, where investors were overall impressed with the group’s exponential growth in the past few years despite the sector downturn. We expect a higher order book replenishment in the financial year 2018 (FY18) as it rides on favourable oil price outlook. This coupled with the current all-time-high order book of RM5.3 billion should drive better earnings growth in FY18. In addition, the success in penetrating new markets will lift earnings. All these factors prompt us to raise our earnings per share by 11% in FY18 to FY19.

Management highlighted that engineering, procurement, construction and commissioning (EPCC) will be a key piece of the puzzle to drive FY18 earnings growth. Beyond organic growth, Serba will also look out for potential acquisition targets which will allow it to strengthen its presence and penetrate new markets (that is to say: Nearby Southeast Asia regions, Africa, Kazakhstan). Serba’s strategy to expand into asset ownership business will continue to provide decent investment returns as total investment costs can generally be recovered by the early EPCC contract secured. To date, Serba has invested about RM70million in equity, and in return has secured RM1.3 billion worth of EPCC jobs. In addition, the associate profit and long-term maintenance service contracts will provide further upside to earnings.

The meeting also allayed some investors’ concern about the unresolved Qatar crisis. Contrary to some expectations of a lower Qatar contribution, work activities from the region remain unaffected and even surpassed Serba’s expectations. In the third quarter of 2017, Qatar’s contribution to total revenue increased to 23% versus 18% in the second quarter of financial year 2017 (2QFY17). Management foresees higher work opportunities going forward as Serba continues to fill the vacuum left by contractors that have pulled out of the region, providing a boost to FY18 earnings. — Affin Hwang Capital Research, Dec 13
 

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