Analysts downgrade Serba Dinamik after audit matter flagged

Analysts downgrade Serba Dinamik after audit matter flagged
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KUALA LUMPUR (May 27): Most investment analysts have recommended their clients to shy away from Serba Dinamik Holdings Bhd for the time being, citing the uncertainties after its external auditor flagged some matters pertaining to statutory audit.

Analysts have downgraded their calls on Serba Dinamik, which was the oil and gas sector's favourite prior to the announcement on Tuesday on the setting up of an independent review over the matter raised by its auditor KPMG.

The company did not reveal details in the filing with Bursa Malaysia. However, The Edge learned that Serba Dinamik held a briefing with fund managers and analysts yesterday.

Analysts expected the news on an independent review would trigger potential selling pressure on its shares as corporate governance and financial integrity would be a concern before the outcome of the independent review, which may take a while to complete.

Serba Dinamik has suspended the counter from trading today, pending the release of further clarification for the announcement made earlier. The stock was last traded at RM1.61, which has fallen from the recent high of RM1.93.

In a statement issued late last night, Serba Dinamik said it had consulted with the exchange prior to engaging international independent firms to assess the veracity and accuracy of the matters recently brought up by KPMG.

"As far as we are concerned, we have not changed our business structure materially since the initial public offering (IPO) in 2017 and have worked with KPMG, whose auditors are familiar with our operations, since 2013.

"As far as the management is aware, we have been conducting our business professionally," Serba Dinamik said.

In a note today, Kenanga Research downgraded the counter to "underperform" from "outperform", with target price (TP) of 95 sen, down from RM2.80.

"While we are not suggesting that Serba Dinamik had performed any malpractice or fraudulence in its financial reporting (i.e. innocent until proven guilty), however, the emergence of this issue does place some doubts on the fairness and accuracy of the group's reported financial statements.

"As such, we recommend investors to momentarily avoid the name for the time being, and wait for further announcements as the situation develops," Kenanga Research said.

HLIB Research also downgraded the counter to "hold" with TP of RM1.45, from RM2.30.

It said the independent review "would not be a targeted audit on any individual projects or subsidiaries as the company would be audited on its entire operations".

"We believe that the uncertainties pertaining to the independent review process will bring about jitters to the stock as Serba Dinamik was the only company above a market cap of more than RM5 billion to have received an independent audit request since the beginning of MCO (Movement Control Order).

"Nevertheless, we believe that the stock would deserve a rerating should the independent review process be done without any negative findings," it said.

In a separate note, TA Research said the audit matters raised by KPMG to the board of Serba Dinamik pertains to the company's financials for the financial year ended Dec 31, 2020 (FY20).

"We understand from management that as part of its annual audit process (start: October 2020), KPMG had requested Serba Dinamik for assurances on risk factors. The latter was identified earlier in April 2021 and officially submitted to Serba in early May 2021," TA Research said.

Serba is currently in discussions with "Big 8" audit firms, of which one will be roped in to assist KPMG, it said, adding that the management has provided justifications to KPMG to address its audit findings.

"Nevertheless, an independent review is expected to provide further comfort to KPMG for it to be reasonably satisfied. The review by the appointed firm will be done concurrently with KPMG's ongoing audit.

"Given that the audit matters lie beyond the scope of KPMG's normal statutory audit, hence management needs to appoint an independent reviewer," it added.

The research house also downgraded the counter to "hold" with TP lowered to RM1.70, from RM2.10.

"Concerns of corporate governance and financial integrity weigh on Serba Dinamik at this point in time. Unless clarity emerges, we opine that this development will drag on sentiment. We believe investors will not completely rule out the possibility that KPMG's audit findings may turn out to be material and damning," TA Research said.

PublicInvest Research, however, has maintained its "outperform" with a TP of RM2.37.

The research house wrote that the management indicated it had provided all the required information this month.

"The appointment of an independent third party auditor is to help provide an independent view to the existing auditor. Given Serba's global footprint and exposure in various business segments, the independent review is likely necessary.

"There could be some selling pressure in the short run until this matter is resolved, though we think long-term prospects are intact. Management affirms that business is running as usual," it said.

The company is now targeting to release its annual report by Oct 31, 2021, having recently changed its financial year end to June 30, from Dec 31. It cited challenges in finalising its financial statements from its operations across more than 20 countries due to the Covid-19 pandemic.

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Kathy Fong