ANALYSTS are mostly positive on Serba Dinamik Holdings Bhd after the company bagged its record single-largest turnkey contract worth some RM7.7 bil.
Serba received and accepted a letter of award from Block 7 Investments LLC to undertake the engineering, procurement and construction of an innovation hub, academic campus, related facilities and IT infrastructure in Abu Dhabi, the UAE.
The four-year project, which will commence on May 14, covers three areas i) innovation hub which includes the development of offices, restaurants, exhibition centres, and IT centres, ii) academic campus, and iii) accommodation which includes apartments and hotels, over a total built-up area of 445,000 sq m.
RHB Research has reiterated its buy recommendation on Serba with a TP of RM2.19 pegged to 13x FY20F P/E and the TP translates to a 30% upside and a circa 3% yield. It is positive on the four-year contract win, as the current order book is now lifted to RM17 bil and will provide a strong earnings boost over the next few years.
The research firm believed that the project will require working capital of up to RM1.5 bil, which could lift FY20 net gearing to 1.1x from 0.9x, while the net leverage ratio should be kept below its required 2.5x threshold.
In the longer run, it does not discount the possibility of Serba participating in a small stake in an IT business to grow its IT-related segment.
Management has guided that the initial working capital required is about RM500 mil, which can be sufficiently covered by Serba’s existing cash balance of RM1.3 bil, untapped credit facilities of RM900 mil, and unutilised Islamic medium-term note programme of RM1.5 bil.
Based on RHB Research’s preliminary calculations, the project may require a working capital of up to RM1.5 bil over the next four years. Assuming that such funds are raised under a debt equity ratio of 2:1, this should lift its FY20 net gearing to 1.1x from 0.9x.
Management also reassured that the net leverage ratio will still be kept well below its required threshold level of 2.5x vs 1.9x currently.
The current order book is lifted to RM17 bil from RM10.7 bil, with a 2:3 split between operations & maintenance and engineering, procurement, construction & commissioning. Despite YTD wins of RM8.8 bil, which has exceeded the research firm’s replenishment assumption of RM6.9 bil, it is keeping its earnings estimates pending further guidance.
Assuming the net margin of this project is conservatively estimated at 5% against FY19’s 11%, it will contribute about RM96 mil pa, or 18% of FY20F earnings.
Meanwhile, AllianceDBS Research has upgraded its FY20-21 earnings forecast by 3/9% to factor in contributions from the Block 7 contract and upgrade its SOP-based target price from RM2.70 to RM2.90.
Serba has secured its largest-ever contract in spite of the current economic conditions. Earnings from the aforementioned contracts will peak in 2HFY21 and FY22. An EPCC contract of this nature typically commands a gross margin of around 12 to 16%, which AllianceDBS has assumed to come in at the lower end, i.e. 12%.
“Serba will be liable for damages in the event of failure to comply with the time for completion with a maximum penalty of 10% of the contract price,” said AllianceDBS.
It also said RM500 mil of working capital would be required to execute this project.
However, it believes that there will be minimal contract wins for the year going forward due to current market conditions and the oil price environment. It expects Serba to end the year with an order book backlog of RM14 bil.
At 12.30pm today, Serba’s shares were traded at RM 1.82, up 14 sen from yesterday’s close with over 29 million shares changing hands. — April 16, 2020
