Serba Dinamik seen to continue to ramp up its global expansion

This article first appeared in The Edge Financial Daily, on September 5, 2018.
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Serba Dinamik Holdings Bhd
(Sept 4, RM3.84)
Maintain buy with an unchanged target price (TP) of RM4.72:
Serba Dinamik Holdings Bhd continues to increase its exposure in various countries. To recap, it secured maiden contracts in Laos, Kazakhstan, and Tanzania back in 2017-2018. Going forward, its foothold in Africa via Tanzania allows it to bid for various projects in Guinea and Gabon. Furthermore, its acquisition of a 24.9% stake in CSE Global Ltd has enabled Serba to penetrate certain markets more easily. Management has revealed that a collaboration is underway to secure contracts in the Gulf of Mexico. Furthermore, Serba and CSE expect to cross-sell their products, offering an integrated solution for clients.

 
To recap, Serba has purchased a 20% stake in La Rapida, a Swiss company that manufactures and supplies parts for the power-generation industry. We understand that La Rapida is a licensed original equipment manufacturing supplier for various brands such as General Electric. Management has revealed that internal manufacturing of replacement parts will expand margins for its operations and maintenance (O&M) business. Note that currently, when Serba offers part supplying services under O&M contracts, it obtains the parts from a third-party vendor. Thus, with the acquisition of La Rapida, Serba can either bid more competitively or enjoy better margins.

Besides the acquisition of La Rapida, Serba has also signed a memorandum of understanding with Microsoft to integrate digital capability into its business, especially in the O&M segment. The digitalisation will be carried out for plant turnarounds and routine maintenance management. Serba plans to enable visualisation via virtual reality and augmented reality while real-time work is being done. Data will then be beamed to its Integrated Turnaround Centre. Nevertheless, we expect contributions from this plan to be later on in the future. That said, knowledge that Serba provides services such as this will give it an edge when bidding for contracts.

Serba’s compressed natural gas (CNG) plant in Muara Jambi, Indonesia began operations in 2017, and is operating smoothly currently. Although contributions from the plant are minimal, Pertamina is impressed with Serba’s engineering, procurement, construction and commissioning (EPCC) works and alludes that more CNG plant contracts may be in the pipeline. Furthermore, we understand that a partnership with Tokyo Gas is being mooted at this juncture for the construction of more CNG plants in Indonesia.

Serba’s EPCC contracts in Malaysia are slightly behind schedule, due to the change in government after the 14th general election. Nevertheless, Malaysia’s new energy minister is targeting 20% of power generation to come from renewable energy in 2025. Given that Serba’s plants are hydropower plants, we believe the contracts will likely be maintained. On the other hand, construction of its Chlor-Alkali plant in Tanzania is ahead of schedule. Management has noted that the plant may be completed before the expected completion date of 2020. Management expects to target larger assets for its asset ownership strategy after proving itself under current contracts. Recall that besides contributions from share of associates and EPCC contracts, Serba benefits from the provision of O&M services for all the plants.

We maintain a TP of RM4.72 based on 15 times 2019 price-earnings ratio. We continue to like Serba due to its: i) global exposure; ii) aggressive expansion into the power and water industries via asset ownership; iii) major development in Pengerang; and iv) robust order book expansion. Reiterate “buy”. — TA Securities, Sept 4