Alternative Views: Has Serba Dinamik’s fairytale run come to an end?

This article first appeared in Forum, The Edge Malaysia Weekly, on June 7, 2021 - June 13, 2021.
Alternative Views: Has Serba Dinamik’s fairytale run come to an end?
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In the past week, Datuk Seri Mohd Karim Abdullah has become poorer by RM1 billion, based on his paper wealth. The stand-off between his flagship company, Serba Dinamik Holdings Bhd, and its external auditor KPMG has cost him and the oil and gas stock dearly.

If there is any consolation, the end of the standoff is probably near. Serba has decided not to remove KPMG as its external auditor, which means issues with regard to the accounts for the financial year ended June 2021 should be resolved in due course.

The week-long episode caused Serba Dinamik’s share price to tumble by 50% and knocked about RM840 million off Karim’s paper wealth. He is also a substantial shareholder in KPower Bhd and Sarawak Consolidated Industries Bhd (SCIB). Both companies felt the knock-on effect from Serba Dinamik’s share price tumble.

In total, Karim’s paper loss is estimated at RM1 billion, and counting.

The dispute over Serba Dinamik’s accounts could mark the end of a fairytale run that started since its listing in early 2017. The next challenge for the Kuching-based company — if there is no change to its external auditor — is to determine whether it would need to provide for the disputed amounts.

The external auditor disputed sales of RM2.32 billion, trade receivables of RM652 million and materials on site (for construction works) of RM569 million. There are also disputes over the company’s project in Bahrain.

The amounts in question are large and would cause an impact on its net tangible asset of 89 sen per share. But it is more than just accounting issues that Serba Dinamik and Karim — the single largest shareholder and driver of the company — have to deal with moving forward.

Serba Dinamik has to regain the trust and confidence of investors, bankers, suppliers and customers, which is an uphill battle. A company’s reputation, once questioned by its external auditor, will always be in question. It gives every reason for institutional investors, bankers and suppliers not to deal with it.

Some companies, such as Aokam Perdana Bhd and Transmile, experienced a process of “slow death”, even after providing for the disputed amounts. In the case of Aokam and Transmile, there was accounting fraud.

In Serba Dinamik’s case, there is nothing to suggest fraud. But its billing as a favoured oil and gas stock has taken a beating and, based on past experience on Bursa, it will be a tough task for it to recover.

For example, KNM was an oil and gas favourite from 2005 until a failed rights issue in 2008. In January 2008, dark clouds gathered as the US financial crisis shook global markets. From RM2.34 per share in early 2008, KNM fell to RM1.97 six months later. Two years later, it was trading at 32 sen.

Government-controlled Kumpulan Wang Persaraan (Diperbadankan) has reduced its stake in Serba to less than 5% while Permodalan Nasional Bhd (PNB) has voiced its concern. The biggest shareholder among government institutional funds is the Employees Provident Fund (EPF), which has about 10% equity interest in Serba Dinamik.

If EPF decided to dispose of its 390 million shares, it would take some time for Serba Dinamik’s share price to stabilise. The provident fund generally does not have any qualms in discarding its interest in companies that have accounting and governance issues, even though it may incur a loss.

For example, it disposed of shares in FGV Holdings Bhd in 2016, four years after the plantation company was listed at RM4.55 per share. When EPF disposed of the stock, it was at less than half of the listing price. In hindsight, the provident fund made the right decision because FGV’s share price fell to less than 30% of its IPO price in subsequent years.

Serba Dinamik was also a favourite among other institutional funds because of its profit growth rate and consistent dividend payouts. Funds such as AIA Investment, Great Eastern Life Insurance Investments and Public Mutual are among its institutional shareholders.

That was why Serba Dinamik was able to carry out large fundraising exercises with ease when the likes of Sapura Energy Bhd and Bumi Armada Bhd were struggling to refinance their debts.

In 2019, Serba Dinamik undertook two US dollar-denominated Islamic bond issues of US$200 million and US$300 million to refinance its short-term borrowings with long-term facilities. The US$200 million bond issue expires next year while the other debt paper is due in 2025.

Last year, it undertook two private placement exercises despite the pandemic. It completed a placement in April and embarked on the second exercise in December, raising close to RM950 million altogether.

Since Serba Dinamik’s listing in 2017, Karim’s net worth, based on his listed shareholdings, has been on the rise despite the volatility in oil prices.

He and his partners — Datuk Abdul Kadier Sahib and Datuk Awang Daud Awang Putera — were worth RM2.5 billion at end-2017. In 2018, their paper worth was RM2.9 billion, and in 2019, it climbed to RM4.86 billion. But last year, ther wealth dropped to RM3.38 billion.

Karim diversified his interests to other listed companies last year. He ended up with substantial stakes in KPower and SCIB, apart from increasing his personal shareholding in Serba Dinamik. Abdul Kadier still has a 16% stake in Serba while Awang has 75 million shares, or about 2% equity interest in the company.

Karim and Abdul Kadier are still buying Serba Dinamik’s shares on the open market. If their moves are to shore up confidence among the institutional investors, it’s a long bet.

M Shanmugam is contributing editor at The Edge

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