This article first appeared in The Edge Financial Daily on February 28, 2020

Serba Dinamik Holdings Bhd
(Feb 27, RM2.32)
Maintain outperform with an unchanged target price (TP) of RM3.33: Stripping out one-off items amounting to RM58 million, Serba Dinamik Holdings Bhd reported a robust net profit of RM198.9 million (+76.4% year-on-year [y-o-y]) for the fourth quarter ended Dec 31, 2019 (4QFY19) on the back of a solid RM1.4 billion in revenue (+39.1% y-o-y). For full FY19, the group recorded surges of 37.9% and 41.7% in revenue and net profit to RM4.5 billion and RM554.6 million respectively.

Its year-to-date performance was attributed to stronger contributions from all segments which saw a growth of 33% in operation and maintenance (O&M), 46.8% in engineering, procurement, construction and commissioning (EPCC), and over 100% in other services. Notable contributions were from the Middle East region, Malaysia and Indonesia. Its margins saw slight increases at the gross and net profit levels to 17.9% and 12.2% respectively (FY18: 17.7% and 11.9%). The numbers were above our and the consensus full-year estimates, accounting for 112.6% and 117.4% respectively. We keep our FY20 to FY21 forecasts unchanged in anticipation of earnings remaining stable on the back of a strong outstanding order book of about RM10.7 billion. We reiterate our “outperform” rating on Serba with an unchanged TP of RM3.33 based on 16 times price-earnings ratio over forecasted FY21 earnings per share of 20.8 sen. A fourth interim single-tier dividend of 1.4 sen was declared, bringing the total dividends declared for FY19 to 7.5 sen.

As expected, the group reported stronger 4QFY19 numbers in comparison with 3QFY19’s, with revenue and core net profit jumping by 30.2% and 75.7% respectively to RM1.4 billion and RM198.9 million. The performance was attributed to higher contributions from all segments with O&M, EPCC and others (information technology-related services) growing by 25.2%, 34.9% and over 100% quarter-on-quarter. Significant increases in O&M ctivities were seen in Malaysia, Qatar and Turkmenistan, while an improved performance in EPCC was mainly derived from a contract with Msufini (T) Ltd in Tanzania and some fabrication works for Petronas Carigali. A higher share of profit from associates of RM20.5 million (3QFY19: RM8.7 million), contributed mostly by CSE Global Ltd and Konsortium Amanie JV, also contributed to the strong performance.

With the recent contract wins worth RM940 million, Serba’s outstanding order book in hand currently stands at approximately RM10.7 billion, providing earnings visibility for at least two years (based on FY19’s O&M and EPCC recognition).

Management is targeting to achieve an RM15 billion order book by the end of this year, translating into a growth of 50% from last year’s target of RM10 billion. Nevertheless, given its strong presence globally, coupled with its good relationship with clients and commendable track record, we believe this is achievable. Projects in the pipeline may include EPCC for petrochemical-based projects locally and overseas worth over RM5 billion. Other potential jobs may also come from the O&M segment in Malaysia, Middle East, Africa and Mexico. — PublicInvest Research, Feb 27