RHB Research is positive on Serba Dinamik Holdings Bhd’s proposed 10% share capital private placement as additional working capital would enable the company to grow further.
The research firm has maintained its buy call on the stock but with a lower target price of RM2.09.
“While Serba Dinamik is not in financial distress, the reduction of net gearing to 0.6x from 0.9x also addresses concerns on its short-term liquidity and escalating gearing level, especially after the firm’s recent RM7.7 bil Abu Dhabi turnkey project win,” said RHB Research.
Serba’s private placement of up to 394.6 million or 10% of the total number of issued shares, at a price to be determined later, does not require further approval from shareholders, since the general mandate was approved at the previous AGM on June 20, 2019. The placement may be implemented in one tranche and is expected to be completed by 2Q20.
RHB Research said if the placement is undertaken at an illustrative price of RM1.47, Serba could raise RM580.1 mil from the exercise. The bulk of the proceeds of RM315.9 mil (54%) will be funnelled for working capital, while the remaining RM250 mil will be used to pare down bank borrowings. With that, its FY20 net gearing will be reduced to 0.6x from 0.9x.
The research firm said it is positive on the exercise as it addresses investor concerns over the short-term liquidity and escalating gearing level after winning the turnkey project in Abu Dhabi.
Besides this, it allows the company to have the financial capacity to expand both its operations and maintenance, and engineering, procurement, construction, and commissioning businesses – which require higher working capital.
Management had guided that the working capital requirement for the mega project is kept at RM500 mil over the next four years. No further debt-raising is needed, as long as the company’s order book remains below RM15 bil by end-FY20.
However, the research firm opines that Serba may see an additional RM300 mil debt drawdown with every RM1 bil order book addition. Serba also reassured that the net leverage ratio will still be maintained well below its required threshold of 2.5x, vs 1.9x currently.
In its valuation of Serba, RHB Research had not imputed earnings from the RM7.7 bil project, which may add net profit of circa RM96 mil pa, or about 18% of FY20F earnings, pending the financial closure of the project owner. Its TP is adjusted to RM2.09 from RM2.19, pegged to a higher FY20F P/E of 14x (from 13x) on its strengthening balance sheet for further expansion. Risks include lower-than-expected order book replenishment and weaker-than-expected margins.
At 12.30pm today, Serba’s shares were traded at RM1.57, down five sen from yesterday with 18.8 million shares changing hands. — April 24, 2020
