This article first appeared in The Edge Financial Daily on May 17, 2017 - May 23, 2017

Serba Dinamik Holdings Bhd
(May 16, RM2.05)
Initiate coverage with buy and a target price (TP) of RM2.90: Our TP of RM2.90 is based on 9% weighted average cost of capital for Serba Dinamik Holdings Bhd’s utility assets and 12 times financial year ending Dec 31, 2017 forecast (FY17F) price-earnings ratio for its operation and maintenance (O&M), and engineering, procurement, construction and commissioning (EPCC) segments. The group posted a three-year fully diluted earnings per share (EPS) compound annual growth rate (CAGR) of 63% for FY13 to FY16. We conservatively forecast Serba Dinamik’s EPS CAGR at 23% for FY16 to FY19F, underpinned by strong demand for O&M services as oil prices recover and stabilise, which would result in higher activity levels across the O&G and power-generation industries. Furthermore, we are sanguine about its market penetration in the Middle East.

Middle East revenue contribution grew from 19.5% in FY13 to about 51% in FY16 at RM1.1 billion, mainly from the United Arab Emirates, Qatar and Oman. This translated into a three-year revenue/operating profit CAGR of 123%/98% for FY13 to FY16. We forecast revenue/operating profit to grow at a three-year CAGR of 24%/25% for FY16 to FY19F. This will be supported by: i) stronger market reputation and penetration; ii) higher demand for maintenance services; and iii) expansion of EPCC work. We expect the Middle East to remain Serba Dinamik’s main revenue contributor for FY17F to FY19F. Although overall margins are expected to be weaker in FY17F due to competitive pricing pressure on Malaysian business, we expect to see progressive improvement in the group’s operating margins for FY18F/FY19F due to increasing contribution by Middle East contracts with higher margins. 

Besides the Middle East, the group is poised to capitalise on business opportunities in Sarawak and Johor. We believe Serba Dinamik is slated to win additional contracts in Sarawak as more oil and gas, power generation and infrastructure investments pour into the state in coming years. Serba Dinamik is also planning to develop a centralised utility facility in Bintulu, Sarawak. In Johor, it plans to build a new fabrication facility to cater for EPCC work, and inspection, repair and maintenance services for the refinery and petrochemical integrated development and also for future projects in the Pengerang Integrated Petroleum Complex. — AllianceDBS Research, May 16