KUALA LUMPUR (April 23): Credit ratings provider S&P Global Ratings has assigned a preliminary 'BB-' long-term issuer credit rating with a stable outlook to Serba Dinamik Holdings Bhd and the proposed sukuk trust certificates that the company guarantees.

In a statement today, S&P Global Ratings said the rating reflects the company's modest scale with commoditised service offerings, limited record of large-scale project execution outside of oil and gas, large investment needs for future business growth, and somewhat untested asset acquisition strategy.

However, 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 Global Ratings.

"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, i.e. operations and maintenance, and engineering project execution--primarily targeted to the oil and gas (O&G) and power sector. This means pricing invariably takes precedence over branding and technical capabilities for new contracts bidding," S&P Global Ratings explained.

Still, it said the stable outlook on 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 lasts three years and provides good cash flow visibility, said S&P, adding the company has shown strong revenue and cash flow growth over the past three years.

However, it is of the view that 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.

"In the past, investments were relatively smaller and Serba Dinamik raised equity of about RM800 million over fiscal years 2017 and 2018 to fund them. However, we expect the investments will be debt funded in future," it said, adding such debt-funded growth will raise its leverage.

"We believe the company's proposed US dollar-denominated sukuks will help fund its investments over fiscal 2019 and part of 2020. Still, to fund such continued investments, SDHB will need to raise fresh long-term funding almost every year," it added.