By Ranjit Singh

SERBA Dinamik Holdings Bhd has come a long way since its listing in 2017. It has managed to ride out the volatility in global crude oil prices to achieve a commendable order book of more than RM10 bil for 2019.

Founder and group CEO Datuk Mohd Abdul Karim Abdullah tells FocusM in an interview that the company is in a rapid growth mode.

“The company is expanding and we will ensure that the company’s growth is sustainable despite the challenges that the industry faces,” says Karim.

He adds that although volatile oil prices were a challenge to the company as an oil and gas player, the company was more concerned with fulfilling its contracts and that production continues.

Serba Dinamik has achieved much in its short journey as a listed entity under the able stewardship of Karim. The company is poised for greater things as it looks for new projects in Malaysia and overseas.

“For us at Serba Dinamik, meeting and exceeding expectations is the hallmark of the company. We will continue to build the company sustainably,” says Karim.

However, its recent corporate moves have raised some concerns among investors. Karim recently acquired substantial stakes in two public listed companies, namely Kumpulan Powernet Bhd and Sarawak Consolidated Industries Bhd (SCIB).

Among these concerns were whether Karim would be able to focus his attention on navigating Serba Dinamik. Karim holds a 38% stake in Kumpulan Powernet and 50.5% stake in SCIB.

However, Karim allays such fears. “According to Bursa rules, a person is allowed to hold only one executive directorship with a listed entity and I will continue to serve Serba Dinamik,” he clarifies.

He says the acquisition in SCIB was made to strengthen Serba Dinamik’s civil engineering capabilities as it often wins jobs which require civil engineering expertise, but for some of the jobs that were subcontracted, it was found that the expertise was wanting. It is hoped that with the acquisition, Serba Dinamik would have better control of its supply chain.

The four pillars

The four pillars of Serba Dinamik’s business are operation and maintenance (O&M), engineering, procurement, construction and commissioning (EPCC), IT solutions, as well as education and training.

Karim says O&M businesses contribute around 80% to its revenue currently, with the remainder coming from EPCC and other businesses. Going forward, he foresees that the O&M segment will contribute to around 60% of group revenue.

Some analysts had voiced concerns over the falling margins of the company. Karim attributed this phenomenon to the competitive nature of the business.

“Margins had retreated marginally but we are still comfortable. For FY20, the O&M gross margins are expected to be around 15% to 18% while the EPCC gross margins are forecasted to be in the region of 14% to 17%,” says Karim.

The company has been on a steep growth trajectory since its listing in 2017. For 2018, it registered a 20.7% revenue growth to RM3.28 bil. UOB Kay Kay Hian has projected revenue of RM4.45 bil for the company in 2019 which renders a topline growth of 35.63%.

Elevated gearing

There were some quarters that felt the company had grown too fast. As a natural consequence of its explosive growth, the company had a heightened level of leverage.

In 2QFY19, Serba Dinamik’s gearing surged close to 1.25x. According to UOB KayHian, the elevated level of gearing was necessary to support its negative cash flow due to high business growth. It adds that gearing levels would ease by the end of FY19 and this would be reflected in its 4QFY19 results which have not been disclosed at the time of writing.

An analyst with an international broking house tells FocusM that the elevated levels of gearing for the company were not a source of concern.

“As long as the company executes its projects and grows its order book, the elevated gearing level is fine. They need to burn cash to complete their projects and they have always ensured that they replenished their order book,” says the analyst.

Another analyst with a bank-based broker says as long as the company takes on leverage for working capital, the gearing levels were not worrisome.

“The debt level is manageable as most of the debt is for working capital purposes. As long as the company keeps its payables and receivables in check, it should manage well,” says the analyst.

An update on some projects

Serba Dinamik’s recently secured RM1 bil chlor-alkali and power plant EPCC in Uzbekistan will probably generate earnings in 1QFY20 after the planning stage is concluded. The chlor-alkali plant is a 40:60 venture with an Uzbekistan government-linked company. It is expected to have a 90 metric tonne capacity per annum.

The RM259 mil Bintulu Integrated Energy Hub (BIEH) project had completed its maintenance, repair and overhaul (MRO) facility as scheduled. It will start executing its MRO contracts in 1QFY20. UOB KayHian says plant utilisation will gradually rise from the initial 30%.

BIEH will provide support for surrounding downstream sites including nine LNG trains at Petronas LNG (2km away from BIEH), the Asean Bintulu fertiliser plant, Murphy’s Bintulu onshore receiving facility, the Bintulu crude oil terminal and Sarawak Energy’s power plants.

Its 57-acre Pengerang Integrated Development which cost RM768 mil to develop is on track for completion in 4QFY20.

Commendable 3QFY19 results

Despite seasonal weakness, the company managed to post a commendable set of results for 3QFY19. The company had achieved an order book of more than RM10 bil for 2019 and is targeting an order book of RM15 bil in 2020.

The company posted a net profit of RM355.8 mil for the nine-month period which translated to 27.7% growth compared to a year ago, while revenue was up 37.4% to RM3.17 bil.

Serba Dinamik incurred a capex of RM600 mil in the 9MFY19 period which was at the same level as in 2018. The capex was mainly for the completion of its large projects in Pengerang and Bintulu.

“While Ebitda generation remained strong at RM200 mil per quarter, operating cash flow improved slightly from RM63 mil to RM110 mil in 9MFY19 despite the high working capital requirements to execute both its O&M and EPCC projects at its current RM10 bil order book base,” UOB KayHian said.

The way forward

All 11 analysts who track the stock on Bloomberg had a buy recommendation on the stock. The consensus target price was RM2.69 and it closed at RM2.35 on Jan 20. – Feb 10, 2020

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