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Serba Dinamik’s GSH stake seen to expand biogas energy exposure

Serba Dinamik Holdings Bhd
(Nov 23, RM3.86)
Maintain outperform with an unchanged target price (TP) of RM4.45:
Last Thursday, Serba Dinamik Holdings announced that it had acquired an additional 10% stake in Green & Smart Holdings plc (GSH) for RM13 million cash, thereby increasing its stake in GSH to 25%. The acquisition is expected to be completed by the fourth quarter of financial year 2018 (4QFY18).

Recall that Serba Dinamik had initially acquired the first 15% stake in GSH in July 2018 (refer to our report dated July 20, 2018) for cash of RM17 million. GSH is primarily engaged in renewable energy, with expertise in biogas plants, and is listed on the London Stock Exchange.

The acquisition was done based on its five-day volume weighted average market price, implying 13 times price-earnings ratio (PER), based on GSH’s RM10 million historical earnings.

This is slightly above its initial 15% stake acquisition at 11 times PER, but we still deem the valuations to be acceptable, nonetheless with it still below Serba Dinamik’s ascribed valuation of 15 times PER.

Overall, its stake in GSH provides Serba Dinamik added exposure to the biogas renewable energy space, as well as added contract jobs flow.

Moreover, the additional 10% stake would enable Serba Dinamik to have first rights of refusal on all future  engineering, procurement, construction and commissioning (EPCC) works under GSH, while also increasing management’s influence on the company.

To date, GSH has already awarded one EPCC contract to Serba Dinamik (awarded in first quarter of financial year 2018 ended March 31, 2018 [1QFY18], with an estimated value at about RM70 million), with GSH in the midst of developing three other biogas plants with an estimated total project value at RM49 million, as well as joint ventures to develop biogas plants with potential EPCC contracts valued at another RM40 million.

The additional 10% stake is expected to enhance Serba Dinamik’s earnings by roughly RM1 million per annum, which is insignificant if compared with FY18E/FY19E (estimate) earnings of RM386.8 million/RM435.2 million.

Likewise, the acquisition is also expected to have little impact on its balance sheet (net gearing of 0.3 time as at end 2QFY18).

All-in, we made no changes to our FY18-FY19E numbers, implying earnings growth of 25% to 13%, driven by its order book of RM7.5 billion, which is the highest ever on record.

We maintain our call on “outperform” with an unchanged TP of RM4.45, pegged at 15 times PER on FY19E earnings.

We continue to like Serba Dinamik for its: i) consistent and commendable track record of earnings growth delivery; ii) dynamic expansions into new markets; and iii) superior return on equity among its peers (22% versus sector average of 8%).

Risks to our call include: 1) lower-than-expected order book replenishment; 2) weaker-than-expected margins; and 3) geopolitical events in the Middle East affecting oil and gas-related activities. — Kenanga Research, Nov 23