Buzzing at East Coast BUY. Last Traded: RM3.70

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1 C O M P A N Y U P D A T E Thursday, February 07, 2019 FBMKLCI: 1, Sector: Oil and Gas THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Serba Dinamik Holdings Bhd TP: RM4.91 (+32.4%) Buzzing at East Coast Last Traded: RM3.70 BUY Kylie Chan Sze Zan Tel: kyliechan@ta.com.my We visited Serba Dinamik Holdings Bhd (Serba) s operations at Terengganu, comprising:- 1) Paka Service Center (PSC), 2) 28MLD membrane water treatment (MWT) plant project site at Pulau Bahagia, and 3) 3MLD mobile membrane filter plant unit. Activities were brisk at PSC, underpinned by a robust orderbook. In particular, PSC is busy with turnaround works for Petronas Chemicals plants at Kerteh. On the other hand, progress is slow for Pulau Bahagia MWT, as the new state government is currently reviewing project details. We maintain Buy on Serba with target price of RM4.91 based on 15x CY19 PER. Our optimism is underpinned by the Group s robust orderbook and earnings. (1) Pulau Bahagia 28MLD Membrane Water Treatment (MWT) Plant Sizeable Terengganu Water Project. To recap, in 1Q17, Serba purchased a 40% stake in Konsortium Amanie (Amanie) for RM34mn. Amanie has secured an RM1.3bn (including financial costs) project from the Terengganu State Government for development of the Kuala Terengganu Utara Water Supply Scheme (KTUWS). This project, with construction cost of RM800mn, comprises:- 1) 120mn litres per day (MLD) conventional water treatment plant, 2) 28 MLD ultra filtration membrane water treatment (MWT) plant, and 3) intakes, service tank, installation of raw water and clean water pipes, retrofitting and other works. Multi Year Earnings from Multiple Fronts. The state government will pay Amanie on staggered basis over a period of 12 years. This translates to associate contribution of RM3.2mn p.a. to the Group. Following Serba s entry as stakeholder, the Group was novated EPCC (Engineering, Procurement, Construction and Commissioning) works for the 28MLD MWT plant, valued at RM290mn. Additionally, Serba is eyeing the upcoming contract tender for MWT s Operations and Maintenance (O&M). We believe the Group has high chance of success, given its status as incumbent EPCC contractor. Whereas for the larger 120MLD conventional plant, EPCC works were awarded to Salcon Bhd. Project Review by New State Government. The mobile 3MLD membrane filter plant unit (Figure 1) built by Serba at the Pulau Bahagia project site is operating smoothly. To recap, this mini mobile unit is a temporary fixture, and intended as proof-of-concept for the MWT plant. Meanwhile, for KTUWS, progress has reached 19.9% completion as at 25-Dec This implies a slight delay versus scheduled completion of 24.45%. This is due to: 1) the recent monsoon season affected earthworks clearing activities, and 2) project review by the state. Nevertheless, Serba has completed the design survey for its MWT plant project, and secured land acquisition approvals. Share Information Bloomberg Code SDH MK Stock Code 5279 Listing Main Market Share Cap (mn) 1,468.5 Market Cap (RMmn) 5, wk Hi/Lo (RM) 4.28/ mth Avg Daily Vol ('000 shrs) 3,423 Estimated Free Float (%) 28.0 Beta 1.1 Major Shareholders (%) Mohd Abdul Karim Forecast Revision Abdul Kadier Sahib Awang Daud KWAP FY18 FY19 Forecast Revision (%) Net profit (RMm) Consensus TA's / Consensus (%) Previous Rating Buy (Maintained) Financial Indicators FY18 FY19 Net Debt / Equity (x) ROA (%) ROE (%) NTA/Share (RM) Price/NTA (x) Share Performance (%) Price Change SDH FBM KLCI 1 mth 1.1 (0.1) 3 mth (6.3) (1.1) 6 mth (4.6) (5.6) 12 mth 5.4 (9.6) (12-Mth) Share Price relative to the FBMKLCI Source: Bloomberg Page 1 of 6

2 Figure 1: 3MLD Membrane Water Treatment (MWT) Plant Extension of Project Completion Date. According to management, the new state government has extended KTUWS s completion date by one year to May-20. This was to enable a review of project details, including the possibility of:- 1) lowering MWT s operational costs post-completion, and 2) revised delineation of geographical coverage areas. Nevertheless, management reassured that Serba s original EPCC contract value of RM290mn remains intact, in spite of any revisions. This is given that any reduction in project costs will be compensated by additional works in other areas. (2) Paka Service Centre (PSC) Workshop With Training Facilities. To recap, PSC workshop (Figure 2) provides Maintenance, Repair & Overhaul (MRO) and Inspection, Repair & Maintenance (IRM) services for rotating machinery. This is via capabilities in machining, equipment overhaul, fabrication, and Electrical & Instrumentation (E&I). Additionally, there are training facilities (Figure 3) at PSC, for practical training and certification of technicians. This enables Serba to offer complimentary training for clients to enhance its product offering. On top of that, PSC receives trainees sponsored by the government via the Teraju program. Typically, Teraju sponsored graduates are recruited by Serba. This enables the Group to benefit on two fronts, namely:- 1) training revenue, and 2) supply of skilled manpower. The latter is pertinent, given that manpower costs account for 20%-40% of workshop operations. Figure 2: Paka Service Centre (PSC) Figure 3: Training Facilities at PSC Page 2 of 6

3 Healthy Orderbook and Margins. PSC is strategically located nearby Kerteh, which is home to Petronas group s integrated O&G facilities. Accordingly, PSC s outstanding orderbook (Figure 4), comprises mainly of contracts from Petronas. Additionally, PSC is also executing works for KTUWS, including MRO for old equipment and parts. Given PSC s long track record and local content, its contracts are usually extended by Petronas based on direct negotiation. According to management, gross margins for its MRO contracts remain healthy, at 12%-16%. The respectable margins are partially driven by PSC s value added reverse engineering capability. This enables Serba to replace old equipment parts that are no longer available in the market. The parts would be sourced externally or fabricated in-house by the Group. Figure 4: Paka Service Center Orderbook Major Contracts Contract (1) Price Agreement (PA) for Service, Repair & Overhaul of Pumps & Motor at PDB Terminal between Petronas Dagangan Bhd and Serba (2) Term Contract to perform turbomachinery maintenance at Gas Processing Plant and Utility (GPU), Petronas Gas Bhd (3) Term Contract for Provision of Manpower & Tools for Mechanical (Rotating) for Planned & Unplanned Shutdown for Petronas Chemicals Ammonia Sdn Bhd (4) Term Contract for Maintenance Package of Solar Mars Turbomachinery at PGB Kuantan Compressor for 2+1 years (5) Provision of Manpower, Equipment, Tools, Transportation and Consumables for Rotating Work Services (MTBE, PCLDPE, ABF, Petronas Chemicals Ammonia) (6) Provision of Maintenance Services for WEIR Compressor for Petronas Carigali (7) Term Contract for Provision of Manpower & Tools for Mechanical (Rotating) for Planned & Unplanned Shutdown for Petronas Chemicals Ammonia LDPE Sdn Bhd Source: Company, TA Research Tenure Mar-19 to Mar-20 Jun-17 to May-19 Jan-19 to Jan-20 Mar-18 to Mar-19 Aug-18 to Aug-20 Jun-18 to May-19 Jan-19 to Jan-20 Upcoming Largest Service Center at Pengerang. PSC is essentially the heart of Serba s IRM & MRO operations at Peninsular Malaysia. Recall that the Group has a larger service center at Bintulu, Sarawak, which generates most of Serba s Malaysian revenue. Nevertheless, moving forward, the Group plans to build its largest service center facility at Pengerang, Johor. It will be known as Pengerang Eco-Industrial Park (PeIP), and comprises part of Serba s integrated development project at Pengerang (Figure 5). It will house Serba s Global Centers of Excellence for IRM and MRO, as well as a Plant Turnaround Village. Figure 5: Pengerang Eco-Industrial Park (PeIP) Master Plan Source: Company Page 3 of 6

4 Upgrading to High End Projects at Pengerang. To move up the value chain, PeIP (total development cost: RM666mn) will target the sophisticated high-end market. PeIP s targeted completion date of 4Q20 was timed to coincide with the expiry of warranty periods for Petronas facilities at RAPID. Therefore, this enables Serba to bid for MRO contracts for plant equipment. We understand that the MRO center is scheduled to complete earlier, ahead of the IRM center. Land clearing works at the project site were completed recently, and hence piling works will commence soon. Maintain Buy on Robust Earnings and Orderbook. We maintain our earnings forecasts as we had earlier accounted for delayed EPCC recognition (over 4 years), for the MWT plant project. Our target price of RM4.91 is based on 15x CY19 PER. Maintain Buy on Serba on the back of: 1) resilient MRO and IRM earnings, 2) diversification into stable utilities business, 3) global footprint, 4) significant capacity expansion at Pengerang, and 5) robust orderbook replenishment. (THE REMAINING OF THIS PAGE IS INTENTIONALLY LEFT BLANK) Page 4 of 6

5 Earnings Summary Income Statement Balance Sheet FYE 31 Dec (RMmn) E 2019F 2020F FYE 31 Dec (RMmn) E 2018E 2019F 2020F Revenue 2, , , , ,282.1 PPE , ,202.0 EBITDA JV & Associates Depreciation (49.8) (69.0) (82.8) (102.6) (120.6) Others Net finance cost (35.0) (33.9) (32.4) (37.1) (43.8) Non-current assets , ,289.2 Associate & JV 0.0 (2.1) Inventories , ,184.9 Forex & EI 0.6 (20.0) Trade receivables , , ,384.7 PBT Cash and equivalents Taxation & Zakat (22.1) (41.3) (44.1) (60.8) (69.9) Others MI (4.2) Current assets 1, , , , ,416.0 Net Profit TOTAL ASSETS 1, , , , ,705.3 Core Net Profit LT Borrowings Per Share Data* Others Core EPS (sen) Non-Current liabilities DPS (sen) Trade payables BVPS (RM) ST Borrowings ,115.5 NTA/Share (RM) Others Current liabilities 1, , , , ,808.5 Ratios Shareholders equity , , , ,833.0 FYE 31 Dec (RMmn) E 2019F 2020F MI Valuations Total Equity , , , ,840.0 Core PER (x) TOTAL E&L 1, , , , ,705.3 Div. Yield (%) P/BV (x) Cash Flow Statement FCF Yield (%) (2.2) (3.8) (1.8) FYE 31 Dec (RMmn) E 2018E 2019F 2020F Pretax profit Profitability ratios Depreciation EBITDA margin (%) Net interest EBIT margin (%) JV & Associate (1.0) (4.0) (4.0) PBT margin (%) Changes in WC (304.7) (361.8) (381.7) (221.2) (266.1) Core Net Margin (%) Tax (22.1) (41.3) (44.1) (60.8) (69.9) Core ROE (%) Others Core ROA (%) Operational cash flow Liquidity ratios Capex (140.8) (265.4) (250.0) (300.0) (300.0) Current ratio (x) Interest income Quick ratio (x) Investment in JV/Associate 0.0 (34.0) (24.0) Others (105.8) (57.8) Leverage ratios Investing cash flow (242.7) (354.1) (267.0) (290.1) (289.2) Equity/total liabilities (x) Net debt / equity (x) Issue of shares Share issue expense Growth ratios Dividend paid 0.0 (69.4) (132.2) (161.5) (176.2) Revenue (%) Net borrowings Core Net Profit (%) Interest paid (39.0) (37.1) (39.4) (47.0) (54.6) Others Key Assumptions Financial cash flow (58.5) (80.8) Orderbook Replenishment 4, , ,400.0 Net cash flow (11.0) Beginning Cash *based on 1,468mn shares Forex 3.7 (3.7) End Cash Page 5 of 6

6 (THIS PAGE IS INTENTIONALLY LEFT BLANK) Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Thursday, February 07, 2019, the analyst, Kylie Chan Sze Zan, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee Kuala Lumpur Malaysia Tel: Fax: Page 6 of 6