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Serba Dinamik’s ICT expansion an upside amid O&G downcycle

SERBA Dinamik Holdings Bhd’s efforts to expand its information and communications technology (ICT) segment should help the firm ride through the oil and gas (O&G) downturn as well as bear fruit over the longer term, as more companies delve into ICT solutions.

The engineering services firm said last week it had secured a US$350 million (RM1.47 billion) engineering, procurement, construction and commissioning (EPCC) contract to build a data centre in Abu Dhabi.

Kenanga Investment Bank Bhd (Kenanga Research) is positive on the contract award, with no major risks seen in the job execution and delivery.

“Most of the works required seem to be fairly low in complexity (for example: Civil works, building works, mechanical, electrical and plumbing works) and should fall comfortably within the group’s expertise,” it wrote in a recent note.

The research house said Serba Dinamik’s orderbook stands at RM18.5 billion to date, of which 10% is derived from its ICT segment.

“As a comparison, the ICT segment had only contributed less than 5% of its orderbook during the start of the year.

“The expansion of the group’s ICT segment also provides the group an additional source of revenue away from O&G, especially when the sector is currently in the middle of an extended downcycle,” it added.

Following the contract announcement last week, Serba Dinamik group MD and CEO Datuk Dr Mohd Abdul Karim Abdullah told The Malaysian Reserve that the group is aiming to secure additional contracts to boost its performance.

The current bids in progress have a total value of RM17 billion, of which 40% are in the O&G sector, 40% are in non-O&G and 20% are in the ICT industry, he added.

The RM1.47 billion project, which is expected to start on Sept 1, is the company’s fourth contract win this year, bringing its year-to-date wins to RM10.9 billion.

Kenanga Research expects the contract to fetch a gross margin of roughly 15% to 20%, in line with Serba Dinamik’s historical average. It maintained its ‘Outperform’ call on the group with a target price of RM2.70.

Public Investment Bank Bhd kept its earnings forecasts for Serba Dinamik unchanged despite the new contract win, as profit recognition from the project is only expected to be more meaningful from the financial year of 2021 (FY21) onwards.

It sees the group reporting “relatively flat” earnings for its second quarter ended June 30, 2020, given the Movement Control Order which limited work progress.

“We affirm our ‘Outperform’ rating on Serba Dinamik, nonetheless, with a target price of RM2.45,” it said.

RHB Investment Bank Bhd (RHB) said the firm’s ICT segment will fuel future earnings growth, as more clients are ramping up their investments in ICT applications.

Post-contract win, Serba Dinamik’s orderbook expands to RM18.5 billion, comprising EPCC (50%), operations and maintenance (40%) and ICT (10%) jobs.

“As Serba Dinamik is targeting to generate RM300 million in revenue from the ICT segment in FY20 ending Dec 31, 2020, we believe this will be a new source of growth, especially since many O&G clients in the Middle East are also ramping up their investments in ICT applications,” RHB said in a note.

It’s keeping a ‘Buy’ call on the engineering firm, with a target price of RM2.55.

Serba Dinamik’s share price settled 2.34% or four sen lower at RM1.67 last Friday, with a market value of RM5.63 billion.