HLIB expects Serba Dinamik to record strong earnings despite volatility

HLIB expects Serba Dinamik to record strong earnings despite volatility
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KUALA LUMPUR (Nov 6): Hong Leong Investment Bank (HLIB) Research has maintained its "buy" call for Serba Dinamik Holdings Bhd at RM1.52 with an unchanged target price (TP) of RM2.50 on improved earnings prospects.

The research house’s analyst Low Jin Wu in a note today maintained his rating as he believes recent weakness in Serba Dinamik's share price presents a very good opportunity to buy into the stock as his TP implies an upside potential of almost 70%.

Besides that, he said Serba Dinamik would be able to maintain its high earnings before interest and tax margins for its operation and maintenance (O&M) division, while the recurring nature of its O&M order book would also ensure earnings sustainability in the foreseeable future despite lower prospective contract wins seen for the financial year ending Dec 31, 2021 (FY21).

Low also expects Serba Dinamik's earnings to grow exponentially for FY22 when its Block 7 project hits its peak earnings phase.

Low participated in a conference call with the management of Serba Dinamik to get an update on the company, and he still expects Serba to record strong earnings despite the volatility and challenges in the oil and gas (O&G) industry.

Meanwhile, all of the company's expiring O&M contracts are expected to be renewed, and it believes that it will be able to maintain its margins.

While job tenders have slowed down, Low said the group’s tender bids remain healthy at about six to 10 tenders per month (compared with 12 to 15 per month in FY19).

Its FY21 order book growth is expected to be underpinned by its information and communications technology (ICT) segment, while the Teluk Ramunia yard is expected to improve overall engineering, procurement, construction and commissioning (EPCC) margins, he said.

“We believe that prospective job wins for Serba Dinamik are expected to slow down in 2021 due to current economic activity. However, the trend of renewals for existing O&M contracts is still happening, and we expect its O&M margins to be maintained going forward as there have been no contract renegotiations thus far,” said Low.

According to the analyst, Serba Dinamik's order book backlog of RM18.5 billion would also be able to sustain its earnings growth in the next two years as the burn rate of Block 7 and the innovation hub contract is only expected to peak in FY22.

“Its Teluk Ramunia yard is also expected to improve its overall operational performance and margins as it would be able to internalise more contracts that were previously subbed out [to subcontractors]. It can also tender for more projects with its new yard in place,” said Low.

At the midday break today, Serba Dinamik's share price was unchanged at RM1.52, valuing the company at RM5.12 billion.

Surin Murugiah