This article first appeared in The Edge Financial Daily on October 18, 2019

Serba Dinamik Holdings Bhd
(Oct 17, RM4.30)
Maintain outperform with an unchanged target price (TP) of RM5.25: On Wednesday, Serba Dinamik Holdings Bhd announced securing a series of contracts, which include two overseas contracts worth US$163 million (RM682.97 million), as well as three domestic contracts with no specific value as they are on a “call-out” basis.

Among the domestic contract wins is one appointment of being a panel contractor by Petronas, for the provision of mechanical rotating equipment services and parts. While this is not a job specific contract per se, it qualifies Serba Dinamik to be able to compete for and secure mechanical rotating maintenance jobs locally.

Excluding this appointment as a panel contractor, we guesstimate the two other domestic contract wins to be worth about RM100 million, thereby bringing the total contract value announced on Wednesday to roughly around RM783 million. This brings its year-to-date contract win to roughly around RM3.2 billion (broadly in line with our replenishment assumption of RM3 billion), and latest order book to around RM9.7 billion (broadly in line with management’s end-2019 target of RM10 billion). Note that these figures do not include the panel contractor agreement by Petronas, and hence, any successful work order materialisation from that contract will further boost the order book.

Overall, we are positive on the new wins, highlighting the company’s job execution capabilities as well as competitiveness in securing new jobs.

We reiterate “outperform” with an unchanged TP of RM5.25 (ex-TP of RM2.50), pegged at 15 times the price-to-earnings ratio of financial year 2020 estimate (FY20E) — which is around plus two standard deviation from its two-year mean valuations. Post-announcement, we made no changes to our FY19-20E numbers.

We continue to like Serba Dinamik for having one the best earnings delivery track records within the oil and gas space, coupled with outstanding management and best-in-class return on equity against sector peers. Further contract wins and continued earnings delivery would act as catalysts moving forward.

Risks to our call include: i) lower-than-expected order book replenishment; ii) weaker-than-expected margins; and iii) geopolitical unrest in the Middle East affecting oil and gas-related activities. — Kenanga Research, Oct 17