Serba Dinamik contract wins within expectations, say analysts

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KUALA LUMPUR (July 1): Analysts have maintained strong "outperform" calls for Serba Dinamik Holdings Bhd following the company's announcement of 10 contract wins yesterday, estimated at a sum of RM760 million.

However, analysts are keeping to their existing target prices (TPs), considering the contracts are not too chunky relative to Serba Dinamik’s order book of around RM17.5 billion.

Shares in Serba Dinamik opened higher and rose five sen or 3.03% to RM1.69 in early trade before retreating slightly to RM1.68 — still up two sen or 1.21% with 6.33 million shares traded.

Yesterday, Serba Dinamik said it had secured two contracts in Zambia worth around RM530 million for the implementation of digital microlending and health platforms for ZCOM Systems Ltd, which analysts said are the company’s largest information and communications technology (ICT) contracts to date.

Together with an RM14 million contract for the procurement of Hitec PowerPRO equipment for PT Polytama Propindo in Indonesia, the three overseas contracts are estimated at US$127 million or RM543.5 million.

The company also secured seven operations and maintenance (O&M) contracts on a call-out basis which analysts expect to be around RM220 million combined.

While the wins are small relative to its current order book, some pointed to the fact that the projects were secured despite the cyclical downturn in the oil and gas (O&G) market.

The ICT contract wins are also seen as supporting the company’s ambition to grow the ICT segment as its third core business after O&M and engineering, procurement, construction and commissioning (EPCC), said Kenanga Research in a note today.

“The contribution from the segment is still relatively inconsequential at the moment, but the company is targeting for the segment to grow to around RM300 million in revenue contribution by year end (or 5% of the full-year estimate),” the research house said.

“This also marks the company’s first contracts in Zambia, as well as its second in Africa (the group has existing contracts in Tanzania),” it added, maintaining its TP at RM2.70.

Serba Dinamik is one of three O&G top picks with no "sell" calls among analysts currently, together with FPSO operator Yinson Holdings Bhd and storage tank operator Dialog Group Bhd.

Of 11 analysts covering Serba Dinamik, the company has nine “buy” calls and two “hold” calls, with a consensus TP of RM2.28, representing a 35.7% potential upside.

At the time of writing, the company’s shares were trading at around 11 times its 12-month trailing price-earnings ratio (PER).

Overstretched by big-ticket play?

Currently, around 45% of Serba Dinamik’s order book hinges on the massive US$1.78 billion turnkey EPC contract for the Abu Dhabi Innovation Hub in the United Arab Emirates (UAE) which spans four years from its initial commencement date of May 2020.

Considering the scale of the project, there are concerns over execution risk and working capital limitations, although analysts guided that the works will be contracted out to experienced subcontractors.

“Given the sheer scale and ambition of this development, we surmise that it is likely backed by the UAE government,” said TA Research in a note in April. “Therefore, this enhances the project’s viability and cushions counterparty financial risk,” it said.

Another development in Serba Dinamik worth keeping an eye on is the RM320 million Teluk Ramunia yard acquisition from Petronas.

Analysts consider the acquisition to be an opportunity for Serba Dinamik to secure EPCC and fabrication works for the upcoming Pengerang Integrated Petroleum Complex (PIPC) Phase 2 development, considering its close vicinity.

At the same time, the buy also allows it to expand into upstream offshore fabrication, although short-term benefits are limited considering the industry’s capital expenditure (capex) cuts this year due to volatile oil prices.

On the flip side, analysts raised concerns over the stretched balance sheet as the acquisition will raise the company’s net gearing to around 1.1 times, and add another RM20 million to finance cost per year or 10% to 15% of its annual net profit.

“In comparison to the most recent transaction, the price is 8.1% higher than when Petronas bought it from Sime Darby in 2011,” said PublicInvest Research in a note dated June 15.