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Serba Dinamik seen to maintain earnings on strong order book

Serba Dinamik Holdings Bhd
(Nov 26, RM4.33)
Maintain buy with a higher target price (TP) of RM5.42:
Serba Dinamik Holdings Bhd’s core profit for the nine months of financial year 2019 (9MFY19) was above expectations on stronger operations and maintenance (O&M) margins and higher contributions from joint ventures (JVs) and associates. We expect its earnings to pick up seasonally for the fourth quarter (4QFY19). Serba Dinamik remains one of our sector top picks, with a consistent earnings growth backed by a robust order book, coupled with contract flows. These remain key catalysts for the company’s share price.

Its 3QFY19 core profit of RM113 million, or -13% quarter-on-quarter (q-o-q) and +36% year-on-year (y-o-y), brought earnings for 9MFY19 to RM356 million (+26% y-o-y). The results were above our and the street’s full-year estimates at 79% and 76% respectively, largely due to higher contributions from JVs and associates and stronger O&M margins. A third interim dividend per share (DPS) of 2.34 sen was declared, bringing the cumulative 9MFY19 DPS to 7.34 sen versus 5.7sen for 9MFY18.

Serba Dinamik’s 3QFY19 core earnings fell 13% q-o-q, mainly due to lower O&M (4%, as it’s seasonally weaker in Saudi Arabia and Malaysia), engineering, procurement, construction and commissioning (EPCC) (26%, with lower project billings from Tanzania and the United Arab Emirates) and information technology (IT)-related revenue. Interestingly, this was cushioned by higher contributions from JVs and associates, led by higher contributions from CSE Global Ltd (“buy”; TP: 69 Singapore cents) and an additional profit recognition resulting from the difference between the management and audited accounts of certain associates. Cumulatively, its 9MFY19 core earnings surged 26% to RM356 million on stronger O&M (35%, with higher contributions from the Middle East, Malaysia and Indonesia), EPCC (42%) and IT-related services.

Serba Dinamik’s order book remains solid at RM10 billion, and potentially RM11 billion including estimated work orders from master service agreements. Recent news reports stated the management is targeting a RM15 billion order book by end-2020 from an earlier guidance of RM13 million to RM14 billion. However, it is maintaining earnings and top-line guidance of 15% to 20%.

Meanwhile, Serba Dinamik is targeting to increase its capital expenditure (capex) to 20% in FY20 versus RM595 million in 9MFY19, with the potential of a smallish merger and acquisition to enhance technology infrastructure and geographical positioning. With such aggressive growth plans, we expect further sukuk drawdowns for working capital and capex purposes, amid a net gearing of 0.73 times as at 3QFY19.

We raised our FY19 to FY21 forecast earnings to 5% to 7% in view of stronger margins from the O&M division and higher contributions from JVs and associates. Our forecast earnings growth of 10% for FY20 and FY21 is still relatively conservative versus the management’s target of 15% to 20%. Our TP is raised to RM5.42, pegged to 15 times FY20 forecast price-earnings ratio. Take note our TP will be adjusted to RM2.58 upon Serba Dinamik completing a proposed share split and bonus issue by next month. — RHB Research Institute, Nov 26