A global scale-up
Emmanuel Samarathisa 

The oil price crash four years ago may have destroyed many oil and gas players (O&) but a handful of companies not only survived but thrived under the adverse circumstances.

Among them is integrated energy services provider Serba Dinamik Holdings Bhd. It even went as far as listing on Bursa Malaysia early last year amid a depressed O&G outlook. Today, the move has paid off. While many companies are stanching financial losses or rushing to profit from rallying oil prices, Serba has been posting back-to- back profits since its listing on the bourse on Feb 8, 2017.

“We always tell our shareholders and potential investors that our core competency and core revenue driver is operations and maintenance (O&M). As long as the production platforms for oil & gas are still running, we are in business,” Serba group chief executive officer Datuk Mohd Abdul Karim Abdullah tellsFocusM.

To be sure, the Serba brand is far from callow. Founded by Abdul Karim in 1993, the com- pany began as a maintenance, repair and operations (MRO) services provider for rotating equipment. The following year, it entered into the O&G industry in Bintulu, Sarawak, providing an array of services including MRO as well as minor fabrication for non-pressurised tanks and civil works.

When Serba first announced its listing ambitions, stakeholders were sceptical, recalls Abdul Karim. “Because this was during the collapse of oil prices, it was difficult to convince people about the nature of our business. Those days during our roadshows, we had to explain to people the nature of business,” he says. The confidence booster, according to Abdul Karim, came when he unveiled the numbers. “This gave them the confidence to support us,” he adds.

At the time of writing, Serba boasts a market capitalisation of RM5.38 bil, a staggering figure in less than two years on the bourse. During that time, its share price rose sharply from RM1.50 to RM3.67 on Dec 4. The group has also produced robust earnings where it recently posted higher profits for the third quarter ended Sept 30, 2018, at RM83.2 mil from RM68 mil the same period last year. Revenue climbed to RM770.2 mil from RM653.3 mil the preceding year. The positive numbers were mainly from its O&M segment as well as MRO activities in the Middle East. As for margins, the group has maintained a pre-tax profit margin at 13%.

A strong footing

Naturally, this makes Serba an analyst’s delight. “If you look at the oil price circa 2014-15, oil and gas companies generally struggled. But Serba’s orderbook tremendously expanded. What this says is that the group is in the right market, operating the business in the right way,” Affin Hwang Capital analyst Tan Jianyuan tells FocusM. “Even with its cost structure during the crash, it was able to compete very aggressively. Quarter-on-quarter, it has been recognising high earnings. While everyone in the industry is struggling, it has a strong footing. Also note that the company’s orderbook replenishment has been well with the recovery in oil price. So we remain positive on its orderbook and that there is more to come moving forward.”

Another analyst, Kong Ho Meng of UOB Kay Hian, notes that while it is difficult to ascertain whether Serba will continually hit a home run, “these couple of years, the execution has been really solid,” he notes. “It also knows how to take risks properly.”

At the heart of Serba’s expansion is its business strategy of acquiring an associate stake in an asset company capable of winning contracts in either O&M or in engineering, procurement, construction and commissioning (EPCC). For example, it recently acquired a 10% stake in Londonbased Green & Smart Holdings Plc (GSH) for RM13 mil cash. GSH previously completed two bio-gas plants and awarded one EPCC contract to Serba for a 2.7MW biogas plant in Teluk Intan, Perak. The proposed acquisition was part of a strategy to grow Serba’s EPCC business segment and capabilities. The stakes confers Serba with the right of refusal on all future EPCC works under GSH.

Growing too quickly?
But looming over acquisition type companies such as Serba is the proverbial tale of KNM Group Bhd. The oil and gas equipment manufacturer, at its height in 2007, was worth some RM8 bil but it took a series of untoward events, including an accounting fraud, to reduce the company to the RM272 mil dwarf it is today. But the kicker in the KNM saga was the acquisition of Germanbased manufacturer Borsig in early 2008. Back then, Borsig had a strong presence in the area of waste heat recovery systems and the price tag of the acquisition was some RM1.7 bil.

KNM undertook a rights issue of RM2.2 bil to complete the purchase. But after using the proceeds of the rights issue to settle a portion of the RM1.7 bil, there was a sum of RM729 mil that was to be settled through an exchangeable bond issue. Financing plans, however, went haywire due to poor stock market sentiment coupled with the liquidity crunch and oil price crash. KNM had to abort its bond issue and after it negotiated with the banks to convert that RM729 mil into a long-term loan, its stock took a beating. Within four months from June 2008, KNM’s share price plummeted from RM2.20 to less than 70 sen.

There is also Serba’s entrepreneurial thrust which has seen the group making forays into frontier and developing markets. Serba has already set up base in Tanzania for its African connection by taking up a 25% stake through a joint venture with Junaco (T) Ltd in Oct 2017. The joint venture sees Serba running a chlor-alkali plant in the Msufini area in Tanzania.

Closer to home, it has moved into Laos through the acquisition of a 49% stake in OHP Ventures Inc (OHP) for RM3.33 mil to expand its EPCC business segment and capabilities. This exposes Serba to an energy project OHP is jointly developing in Laos. The project, which started in July this year, is scheduled to be completed by January 2022.

More recently, Serba expanded into India after acquiring 30% of information technology (IT) solutions provider eNoah iSolution India Pvt Ltd for RM15 mil. Next on the list is Central Asia which includes countries such as Kazakhstan and Uzbekistan.

Such seemingly risky areas might cast doubt over Serba’s expansion. But according to Abdul Karim, even the African move was done after consultation with well-respected institutions such as the Islamic Development Bank (IDB) “which has more than 30 years’ experience in dealing with different countries in the region,” he says. “Based on the IDB’s projections as well as Serba’s own internal in-house risk management team, we decided to enter Africa and so far, things are moving and going on quite well.”

Abdul Karim reckons that as long as Serba is positioned as an economic enabler, other countries will continue to collaborate with the group. “If you truly respect the locals, provide jobs for them and help them in developing the economy of their country, nobody will want to reject us. That’s the philosophy we are holding on to,” he says.

UOB’s Kong observes these movements as calculated and sensible. “Serba doesn’t simply acquire companies,” he says. “It properly evaluates the risks, rewards and tries to not be concentrated on one project.” He does not discount some lossmaking but sees that overall, the group stands to be profitable on the back of a growing orderbook. “When it acquires companies, it gets contracts. These acquisitions are supposed to upsize Serba’s attractiveness. It is possible it’ll do well.”

A global one-stop shop

The positive here is that Serba plans to maximise its competencies in its core business of O&M and EPCC rather than adopt a“non-core” diversification programme. “There are no plans to move away from our core business. We need to be an expert in the area we are in and we believe that what we are doing is something in demand always.

Consider, if you go to a producing asset whether it is a production platform or a refinery or a power plant, and these places will have all these rotating equipment, that is where we can come in to provide these services.”

But there is more to Abdul Karim’s plan. He wants to build a global one-stop shop or “Global Centre of Excellence.” According to him, this has been the main goal of the group and Serba has been moving in that direction. “We want Serba to go global,” says Abdul Karim. So it is no surprise that he will be banking on technology to be the group’s catalyst for FY19. “If we consider Serba’s journey over the last 25 years, we started off as a company that supplies manpower. We slowly expanded but in our talks with customers, we found that they would prefer to have a one-stop centre of sorts. This means that when customers award you contracts, they expect you to come in with the full suite of expertise, from manpower to logistics support. But more importantly, they want you to come in together with components and parts as well as other consumables that are needed to carry out the job,” he says.

The other reason for such a pursuit is that many of Serba’s maintenance jobs could not be done in situ. “When damage to the equipment is quite severe, it has to be brought back to the workshop. Initially, before we received a capital injection, we just had a very average workshop setup with minimum capabilities in terms of repair. So what we have been doing at the moment, for example, for Pengerang Eco Industrial Park in Johor, we are investing and building and developing a high-end technology repair workshop,” he adds.

The Pengerang Eco Industrial Park, developed by Serba, will be the country’s first MRO as well as inspection, repair and maintenance (IRM) Global Centre of Excellence for the O&G industry. The entire project will cost Serba some RM1.5bil and will boast a plant-turnaround village as well as a technical and vocational education training city. The first phase of the project is scheduled for completion by 2020.

This is the bigger picture, says Abdul Karim. “We term them as global centres of excellence where each centre renders these kind of services to our customers,” he says. This eliminates the need for the customer to seek the services of other multinational companies, hebelieves. “The global centres we are creating and establishing are more towards completing this one-stop solutions concept that the customer is looking for.”

Indeed, Serba has caught the eye of the global business community. Recently, it was inducted into the 2018 Forbes Asia’s Best 200 Under A Billion list which honours leading public companies in the Asia Pacific region with an annual revenue of between US$5 mill and US$1 bil. These companies should also have positive net income and be publicly traded for at least a year.

Strong execution

But the quest for growth will not override sound business fundamentals, assures Abdul Karim, adding that the group adheres to a due diligence policy whenever it approaches a potential acquisition.

“This process has to be very thorough. We normally look into the liabilities aspect of a certain company in a very serious way. Not only through what’s officially on the books but we also lock into available institutions and platforms such as, in the context of Malaysia, CTOS or CCRIS,” he says, referring to credit reporting agency Credit Tip Off Service (CTOS) and Bank Negara’s Central Credit Reference Information (CCRIS). “Similarly, in the other countries, we look for facilities like these as well just to help us make better decisions. But all acquisitions have to meet our objectives and the fruits that we are looking for.”

Abdul Karim also applies the same careful, measured approach in ensuring that the company’s finances remain healthy. “For example, for gearing, this has been set by our corporate finance and they use that so-called limit based on discussions and agreements with existing bankers or sukuk arrangers,” he says. The gearing ratio, which is based on standards set by financial institutions, is set to not exceed 0.75. “This is among the conditions we impose and adhere to and, so far, we are doing quite okay in that aspect.”

Now, all that Serba needs to do to achieve global domination is to ensure tip-top execution of its business strategies. The group has gotten it right in executing defensive business measures and synergy across through its acquisition exercises which, with all things equal, should strengthen its fundamentals. “So if it is able to continue to execute its strategies well, we might expect a positive re-rating of their share price for FY19,” says Tan of Affin Hwang.

This article first appeared in Focus Malaysia Issue 311.