This article first appeared in The Edge Financial Daily on October 11, 2017

Serba Dinamik Holdings Bhd
(Oct 10, RM2.50)
Maintain outperform with a target price (TP) of RM2.85: Serba Dinamik Holdings Bhd’s wholly-owned subsidiary Serba Dinamik International Ltd (SDIL) has signed a joint-venture agreement (JVA) with Junaco (T) Ltd (JTL) for the establishment and operation project of a 45-tonne-per-day Chlorine Skid Mounted Chlor-Alkali Plant. An about 15,787-sq m industrial land in Msufini Area, Tanzania has been identified for this project. 

We understand that the project scope encompasses engineering, procurement, construction and commissioning (EPCC) works of about RM295.3 million, with operation and maintenance (O&M) operations for a period of 10 years plus an additional five years, providing a recurring income flow for the longer term. The JVA is expected to be completed by the first quarter ending March 31, 2018 (1QFY18).

We commend Serba for the ability to secure new awards, more so in a new region, reaffirming our “outperform” recommendation with a TP of RM2.85 based on our 12 times price-earnings multiple to our FY18 earnings per share forecast of 23.8 sen. Our estimates are maintained, as the various scopes based on its duration have been sufficiently accounted for in our order book replenishment assumptions.

JTL and SDIL will establish a new special purpose vehicle in Dubai, known as Msufini LLC, which will hold a 100% shareholding in the Chlor-Alkali Plant project. The shareholdings in the JV company will be: SDIL: 25%; JTL: 75%.

The JVA comprises the shareholders’ agreement, EPCC contract, the O&M agreement, deed of adherence and any other agreements as determined by the parties.

The JVA will thus allow SDIL to be awarded with the about RM295.3 million EPCC contract, and be appointed the operator for O&M for the period of 10-plus-five years.

SDIL’s job scope includes guaranteeing all borrowings and financing in any form. There will be a price agreement structure in place throughout the O&M tenure.

JTL is a leading supplier of water-related solutions, supplying its products and services, mainly water meters, water pumps, water treatment chemicals, pipes and fittings to water utilities, manufacturers, resellers and non-profit organisations.

The company also imports and installs firefighting equipment in the Tanzanian market. Together with its subsidiary companies, JTL operates in more than 10 countries, namely Tanzania, South Africa, Mauritius, the Netherlands, Malawi, Zambia, Uganda, Kenya, the Democratic Republic of Congo and the United Arab Emirates. 

The group will continue to be supported by its core activities in O&M and EPCC, driven by its expansion into international markets which, by its track record, has historically seen about 80% of its contracts renewed. The group’s robust RM10 billion bid book for the next three years will comprise about 70% O&M contracts and about 30% of EPCC. — PublicInvest Research, Oct 10