This article first appeared in The Edge Financial Daily on April 10, 2019
Serba Dinamik Holdings Bhd
(April 9, RM3.80)
Maintain buy with an unchanged target price of RM4.50: Serba Dinamik has rented a third Bintulu service centre (BSC) for one-and-a-half years to cater to higher job flow.
This will be mainly used to service a five-year onshore maintenance, construction and modification (MCM) contract secured from Petronas Carigali in February 2019 as well as Shell MGS contracts.
Serba has received about RM50 million of MCM work orders, expected to be completed by December 2019. It has 849 employees (43% contracted, 41% daily paid, and 16% permanent) in Bintulu to service 21 contracts.
The recent expansion into a third BSC is a good sign as Serba’s current capacity is insufficient to cater to the jobs secured.
We believe the reallocation to the Bintulu Integrated Energy Hub (BIEH) next year would be a strong rerating catalyst as this would allow Serba to bid for more contracts, especially engineering, procurement, construction and commissioning (EPCC) jobs.
Serba’s current outstanding order book of RM8.3 billion comprises RM6 billion of operations and maintenance (O&M) jobs and RM2.3 billion of EPCC jobs
The BIEH targets to achieve physical completion by Dec 10, 2019 with the maintenance, repair and overhaul (MRO) service centre to be completed earlier, by June 2019.
BIEH will consist of an MRO facility, steel fabrication yards and warehouse and storage yards, as well as blasting workshops and nine factories. BSC No 1 and 2, currently on rental, will be progressively moved to the new site.
By our estimates, the massive 30-acre (12ha) development will double Serba’s current maintenance floor space, and its fabrication capacity by slightly more than that.
We are excited over Serba’s next phase of growth on two fronts: 1) the consolidation would help improve group operating efficiency and lead to better margins, and 2) the increase in capacity would enable Serba to bid for more maintenance and construction jobs in East Malaysia, Brunei, Indonesia and Singapore.
Serba is also eyeing nine Petronas liquefied natural gas complex turbine maintenance work, which is still under original equipment manufacturing (OEM).
We raised our financial year ending Dec 31, 2020 (FY20) to FY21 earnings by 7% to 10% on the assumption that the operational consolidation would drive improvement in its O&M segment margin (revised from 18% to 18.5%).
We also revised upwards our FY20 associate profit assumption to RM18.7 million (CSE Global Ltd: RM12 million, Kota Marudu: RM3 million, Tanzania: RM2 million and remaining from Konsortium Amanie joint venture) and that for FY21 to RM22 million from our earlier less than RM10 forecast.
The stock valuation is still compelling at 11 times 2019 price-to-earnings ratio (PER), backed by its strong earnings growth prospects (FY18-20E compound annual growth rate of 22%) driven by its record high order book.
We believe the share price in the near term should rerate on good earnings execution and a robust contract flow.
Any deferment in clients’ maintenance schedules and poor EPCC execution would result in potential earnings downgrades. — Affin Hwang Capital, April 9