SEREMBAN Engineering Berhad (SEB) is slated to make its debut on the Main Market of Bursa Malaysia next Monday, the 10th of May. The company is a one-stop metal fabrication centre for process equipments, metal structures as well as the provision of maintenance and shutdown services.
The bulk of the company's turnover is attributed to the fabrication of process equipment such as unfired pressure vessels, non-pressurised tanks, heat exchangers, ovens, storage tanks, silos, etc. As a one-stop and turnkey fabrication centre, SEB's job scope could also include plant demolition, design and installation works for machinery and equipment.
SEB has been registered with DOSH (the Department of Occupational Safety and Health) since 1994 and is licensed to manufacture heat exchanges, tanks, pressure vessels and other steel fabricated products. In 2005, it was registered to undertake boiler repair works.
Palm oil sector is single largest customer group
Currently, its largest customers are palm oil mills and refineries, which accounted for some 81% of the company's turnover in 2009. Having secured a firm foothold in the palm oil sector, SEB is aiming to diversify its clientele list based on its solid track record in the industry.
The company has identified several key sectors with strong growth potential, including the oil & gas, waste treatment, food processing and pharmaceutical.
Tapping into new growth industries
SEB recently completed a sludge treatment plant in Singapore, which is the largest in Southeast Asia, and a fabrication project for an oil refinery operator in Malaysia. It hopes to leverage on its early successes to further penetrate these markets.
Among others, the company is looking at projects such as design and fabrication of process equipment for onshore oil and facilities, oil terminals, refineries and lube oil plants. Most recently, it entered into a joint venture to provide environmental cleaning services for the oil and gas industry.
Exports account for more than half of turnover in 2009
As a testament to the company's quality and competitiveness, overseas projects accounted for over 57% of total revenue last year. SEB's process equipment has been installed in more than 30 countries. Some of its key markets include neighbouring Singapore and as far as Sri Lanka, Japan and Germany.
To support longer-term growth, SEB acquired a 1.68-acre (0.7ha) piece of land in Rawang last year — the yard when completed, slated by 4Q10, will boost existing fabrication capacity by about 10%. Currently, utilisation stands at about 60% of capacity.
Additionally, the company is also purchasing new fabrication equipment and machines including sand blasting and painting facilities as well as laser cutting and welding machines. In all, capital expenditure is estimated to total some RM12.3 million in the current year.
The expansion will be partially funded through proceeds from the initial public offering (IPO). A total of 19.928 million new shares will be issued at 85 sen per share, raising some RM16.9 million for SEB. Another 8.072 million shares will be offered for sale by its parent company, Success Transformer, which is also listed on the Main Market of Bursa Malaysia. After the IPO, Success will retain a 65% stake in the company.
Project-based earnings may see some volatility
Given the nature of the business, which is primarily project-based, future revenue depends on the company's ability to keep securing new jobs. This could result in a somewhat more volatile earnings pattern.
Nonetheless, if its track record is any indication — turnover and net profit grew at an annual compounded rate of 18.8% and 32.7%, respectively from 2005 to 2009 — SEB should continue to fare well. At the moment, SEB has, in hand, order book totalling some RM20 million and is tendering for projects totalling RM50 million or so.
Based on last year's net profit of RM9.3 million, the IPO was priced at trailing price-to-earnings (P/E) of about 7.3 times. That is less than half the prevailing average valuation for the broader market. The company's net tangible assets per share stand at roughly 66 sen per share.
Uncertain market outlook may temper interest
Having said that, market sentiment has turned more cautious in recent days, rocked by the deteriorating debt crisis in Europe. Investor risk appetite appeared to have declined some given prevailing uncertainties. As such, we may see tempered interest in SEB, at least in the near term.
Typically, under uncertain market conditions, investors gravitate towards companies with more defensive earnings and high yields. SEB has a strong balance sheet, on which it could leverage upon for any future expansion plans. Including proceeds from the public offering, the company will be in a slight net cash position of RM1.5 million. However, it does not have a dividend policy at the moment.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.