KUALA LUMPUR (Nov 19): S&P Global Ratings has affirmed its stable outlook on Serba Dinamik Holdings Bhd, as it anticipates robust expansion and resilient earnings given the company's large order book and primary focus on operations and maintenance contracts.

The rating agency also affirmed the 'BB-' issuer credit rating on Serba Dinamik and the 'BB-' issue rating on the US$300 million sukuk the company guarantees.

"Our stable outlook on Serba Dinamik indicates our expectations that the company will continue to renew expiring contracts and win new deals at a healthy rate, translating into respectable revenue growth and stable margins. We assume the company will manage prudently its growth capital expenditure and working capital investment, so that liquidity remains in check and cash burn reduces steadily," it said.

Serba Dinamik's order book exceeded RM10 billion at end-June 2019, with revenue having more than quadrupled compared to an order book of RM1.7 billion back in December 2014.

"In a high growth phase, the company has maintained consistent to slightly growing margins of 16%-18% for operations and maintenance (O&M) and 16% for engineering, procurement, construction, and commissioning (EPCC)," said S&P.

Though at the same time, S&P said it believes continued and substantial cash burn may raise questions on the company's business model viability and financial prudence, and may erode its liquidity over time.

"We believe the company's growth capital intensity poses long-term challenges to its creditworthiness. Between 2014 and 2018, Serba Dinamik's EBITDA quadrupled to RM562 million. In parallel, working capital investment increased exponentially from 45% of reported EBITDA in 2014 to 82% in 2016 and 87% in 2018. This means operating cash flows have been limited at about RM80 million on average, while average capital expenditure was close to RM245 million across the same period.

"In tandem with the company's recent asset ownership model, acquisition spending picked up to RM270 million in 2018 from RM34 million in 2017. We do not believe such high cash usage will be sustainable because higher debt magnifies the sensitivity of Serba Dinamik's credit metrics to underperformance and increases refinancing risk," it noted.

As such, S&P said if Serba Dinamik fails to derive more operating cash flow from its EBITDA and reduce its cash burn significantly, this could raise questions on the viability of its business model and the prudence of its financial policy. "Such a scenario could lead to a lower rating on Serba Dinamik," it added.

At 11.53am, Serba Dinamik shares added 1.17% or 5 sen to RM4.31 for a market capitalisation of RM6.33 billion.