This article first appeared in The Edge Financial Daily on November 5, 2018

Serba Dinamik Holdings Bhd
(Nov 2, RM3.95)
Buy at a raised target price (TP) of RM4.91 based on an unchanged 15 times calendar year (CY) price-earnings ratio (PER): Serba Dinamik Holdings Bhd is acquiring  a 42.3% stake in E&E Gas Sdn Bhd (EGSB) for RM16 million and subscribing to 10.4 million redeemable convertible preference shares (RCPS) at RM1 each in EGSB for a total consideration of RM26.4 million. The consideration for EGSB shares will be settled via the means of a land transfer. The property is in Lumut, Perak, and measures 10 acres (4.05ha), and is owned by Serba. Subscription to the RCPS will be settled by cash. EGSB will then build onshore LNG distribution infrastructure facilities on the transferred land.

Furthermore, Serba has been awarded the engineering, procurement, construction and commissioning (EPCC) contract for the onshore LNG facilities with a contract value of RM332.8 million. Serba is expected to complete the contract in two years. In addition, it is understood that the redeemable convertible preference shares have a dividend yield of 6% conversion price of RM43.71 with a tenure of five years. We are positive about this new contract and that it is within Serba’s business strategy. Typically, Serba acquires an associate stake in an asset company and then continues to secure the associated EPCC and operations and maintenance contracts.

Year to date, Serba has secured RM2.4 billion new orders versus our order book replenishment assumption of RM3.7 billion. It is important to note that our order book assumption includes contract renewals and ad hoc works. We estimate that the latter figure amounted to RM1.5 billion in financial year 2017 (FY17), and expect a similar value in FY18. Thus, Serba has now exceeded our own order book replenishment assumption for FY18. Importantly, Serba has now achieved its end-FY18 target order book of RM7.5 billion. This is impressive, as this proves management’s capability in securing orders and delivering promises. We do not discount the possibility of new orders for the remaining last two months of FY18 given Serba’s strong track record. Given that Serba has exceeded our expectations in FY18, we have increased our order book replenishment assumption to RM4 billion/RM4.2 billion/RM4.4 billion in FY18/FY19/FY20 respectively from RM3.7 billion/RM4 billion/RM4.2 billion previously. As a result, our earnings forecasts for FY18/FY19/FY20 are raised by 2.9%/4.2%/5.1%.

As a result of this earnings adjustment, our TP is now raised to RM4.91 based on an unchanged 15 times CY19 PER (previously: RM4.72). We continue to favour Serba for the following reasons. Firstly, its global exposure. Secondly, its aggressive expansion into the power and water industries. Thirdly, its major development in Pengerang. Fourthly, its robust order book expansion. — TA Securities, Nov 1