This article first appeared in The Edge Financial Daily on February 13, 2019
Serba Dinamik Holdings Bhd
(Feb 12, RM3.71)
Maintain outperform with a target price (TP) of RM4.45: Serba Dinamik Holdings Bhd is set to deliver its strongest quarterly earnings for the year at about RM108 million for the fourth quarter of 2018 (4QFY18), on the back of higher operations and management (O&M) activities ahead of the winter months. Its order book is expected to reach RM10 billion by year end, from RM7.5 billion currently, keeping them busy at least over three years.
A top pick for the oil and gas (O&G) sector, we are expecting stronger 4QFY18 results. On the back of its seasonally weaker 3QFY18 due to a slowdown in downstream O&M works in the Middle East in the summer months, we believe its 4QFY18 results, set for release this month, are expected to post a stronger sequential performance. In fact, we expect 4QFY18 to be the strongest quarter of the year, arising from an increased oil production ahead of the winter months, coupled with the front-loading of O&M activities before year end.
As such, we believe our financial year 2018 estimate (FY18E) earnings are on track, with 4QFY18 profit estimated to jump 30% and 34% year-on-year and quarter-on-quarter to RM108 million.
Currently, Serba Dinamik has an outstanding order book of RM7.5 billion, on the back of RM2.5 billion new wins in 2018. Moving forward, management guides for the order book to reach RM10 billion by end-FY19, providing earnings visibility for at least the next three years. While the group’s overall job replenishment still relies on its stronghold in the Middle East, the group is also expected to expand into newer markets locally and also in Central Asia.
Our FY19E numbers have imputed a conservative order book replenishment of RM2.5 billion, similar to that of FY18. That said, with our FY19E forecasts being 8% below consensus given more conservative margins and replenishment assumptions, we may potentially see an earnings upside from our numbers.
Serba Dinamik has always maintained its asset ownership business model as the company sees this as strategic to increase its contract winning capabilities, while also providing a synergistic integration towards its core competencies. To recap, Serba Dinamik made total acquisitions worth about RM290 million in FY18.
Most of these acquisitions were minority stakes in various companies, providing improved job-winning capabilities or added operational synergies. Through these inorganic growth avenues, the company is seeking to increase its presence in target markets such as Central Asia, Africa and the US. For its stronghold in the Middle East, the company is seeking to penetrate new markets apart from the O&G industry, such as power or water-related projects.
To recap, we maintained our unchanged TP of RM4.45, pegged at 15 times price-earnings ratio (PER) on FY19E earnings. With the O&G sector facing heavy selldowns in recent months, we are selective in our stock picks within the sector, favouring resilient names that promise earnings delivery. Hence, we reiterate Serba Dinamik as our preferred pick within the O&G sector, given its resilient business nature and commendable earnings delivery; undemanding valuations considering its earnings growth — currently trading at 14 times to 12 times PER, with earnings growth of 25% to 13% for FY18 and FY19E; and a best-in-class return of equity among its peers. — Kenanga Research, Feb 12