This article first appeared in The Edge Financial Daily on April 17, 2020

Serba Dinamik Holdings Bhd
(April 16, RM1.78)
Maintain buy with an unchanged target price (TP) of RM2.19: We are positive about Serba Dinamik Holdings Bhd’s four-year Abu Dhabi turnkey contract win worth RM7.7 billion, as its current order book is now lifted to RM17 billion, providing strong earnings boost over the next few years.

We believe the project will require a working capital of up to RM1.5 billion, which could lift the group’s net gearing to 1.1 times from 0.9 times. Its net leverage ratio should be kept below its required 2.5 times threshold.

To recap, Serba Dinamik received a letter of award from Block 7 Investments LLC for the engineering, procurement and construction of an innovation hub, an academic campus, related-facilities and information technology (IT) infrastructure in Abu Dhabi, United Arab Emirates. The project, worth US$1.78 billion (RM7.7 billion), has a duration of four years starting from May 14.

The work scope covers three main areas over a total built-up area of 455,000 sq m: An innovation hub including developing offices, restaurants, exhibition and IT centres; an academic campus; and accommodation including apartments and hotels.

A successful delivery of this project will establish a very good track record for the company internationally. As the turnkey contractor, the company will appoint a few subcontractors to execute the project. Pending details being ironed out — the earliest by June — we should only see a meaningful earnings contribution in financial year 2021 (FY21). In the longer term, we do not discount the possibility of Serba Dinamik participating in a small stake in IT to grow its IT-related segment.

The management has guided the initial working capital required is around RM500 million, which can be sufficiently covered by the group’s existing cash balance of RM1.3 billion, untapped credit facilities of RM900 million and an unutilised Islamic medium-term note programme of RM1.5 billion.

Based on our preliminary calculations, the project may require a working capital of up to RM1.5 billion over the next four years. Assuming such funds are raised under a debt equity ratio of 2:1, this should lift our FY20 forecast net gearing to 1.1 times from 0.9 times. The management also gave reassurance that the net leverage ratio will still be kept well below its required threshold level of 2.5 times versus the current 1.9 times.

Serba Dinamik’s current order book is lifted to RM17 billion from RM10.7 billion, with a 2:3 split between operations and maintenance, and engineering, procurement, construction and commissioning. Assuming this project’s net margin is conservatively estimated at 5%, it will contribute RM96 million per annum, around 18% of forecast FY20  earnings. — RHB Research Institute, April 16