This article first appeared in The Edge Financial Daily on April 24, 2019

KUALA LUMPUR: S&P Global Ratings has assigned a preliminary “BB-” long-term issuer credit rating with stable outlook to Serba Dinamik Holdings Bhd and the proposed sukuk trust certificates that the firm guarantees. The global rating agency said the rating reflects the engineering solution provider’s modest scale with commoditised service offerings, limited record of large-scale project execution outside of oil and gas (O&G), large investment needs for future business growth and somewhat untested asset acquisition strategy.

Yet these constraints are compensated by its record of timely project execution within budget, respectable client base, good cost control, short but prudent history of equity raising, and investments, according to S&P.

“Serba Dinamik’s services are relatively narrow compared with larger players in the engineering and services segment. The company offers largely commoditised services in nature — that is, operations and maintenance, and engineering project execution — primarily targeted at the O&G and power sectors. This means pricing invariably takes precedence over branding and technical capabilities for new contract bidding,” S&P explained in a statement yesterday.

Still, it said the stable outlook for Serba Dinamik indicates its expectations that the company will continue to renew expiring contracts and win new contracts at a healthy rate, translating into respectable revenue growth and stable margins. Serba Dinamik’s order book stood at about RM8.3 billion as of Dec 31, 2018, which typically would last three years and provide good cash flow visibility, added S&P, saying the company has shown strong revenue and cash flow growth over the past three years.

But it thinks Serba Dinamik will need to invest about RM1 billion a year in working capital and capital expenditure to sustain its growth over the next two to three years.

“We believe the company’s proposed US dollar-denominated sukuk will help fund its investments over fiscal [year] 2019 and part of 2020. Still, to fund such continued investments, Serba Dinamik will need to raise fresh long-term funding almost every year,” it said, adding that such debt-funded growth will raise the company’s leverage. Serba Dinamik’s key strengths lie in its ability to complete projects in time and within budget, and its record of repeat business, said S&P.

“Serba Dinamik has maintained good project delivery and superior margins. We therefore believe the company can maintain healthy growth and margin sustenance over the projected time horizon.

“Serba Dinamik’s focus on operations and maintenance business for O&G companies’ producing assets bears limited correlation with O&G prices. This provides it with better operational stability and cash flow visibility,” S&P added.