By iFAST Research Team
SHARES of Serba Dinamik Holdings Bhd have plummeted by more than half following the resumption of trading. The bonds of Serba Dinamik suffered a similar fate with bid quotes for their USD bonds SDHMK 6.300% 09May2022 Corp (USD) and SDHMK 6.997% 12Mar2025 Corp (USD) reaching as low as 30 cents to the US dollar (70% below par).
On May 25, Serba Dinamik announced that its external auditors have flagged concerns about matters relating to its statutory audit. The company informed that it will soon appoint an independent firm to verify the audit matters. On May 28, a company response was provided to the queries raised by Bursa Malaysia which we will be examine in this article.
Examining KPMG’s raised issues
Referring to Serba Dinamik’s unaudited results for financial year ended Dec 31, 2020, we noted that the RM608.94 mil increase in trade receivables during 2020 is nearly equal to the RM652 mil of receivables flagged by KPMG.
Furthermore, COVID-19 exacted turmoil in the energy industry last year where oil prices plunged and countries were cutting production.
However, Serba Dinamik grew its gross profits for its operations & maintenance (O&M) segment by 26.5% year-on-year (yoy).
Yet Table 1 shows that other similar energy companies listed in Malaysia have seen a decline in annual revenue. During 2020, Serba Dinamik reportedly increased its revenue by 32.8% yoy.
Additionally, in December 2018, Serba Dinamik made a 30% acquisition in eNOAH iSolution India Pvt Ltd for RM 15 mil to improve its IT solutions segment. In 2019, its share of total comprehensive income from eNOAH was RM 1.14 mil. However, with this acquisition, its 2019 audited gross profits from the information, communication, and technology (ICT) segment multiplied by about 10 times to RM21.23 mil.
Subsequently in 2020, gross profit for this segment increased by 206.79% to RM65.13 mil in what seems to be amazingly quick growth.
While we have the company’s balance sheet and credit ratios in Table 2 and 3 respectively, there is a chance that the some of the numbers may be subjected to change due to the company’s fluid and developing situation as well as the questions brought up by KPMG.
This makes analysis more difficult but we will rather be safe than sorry in this situation due to the below reasons.
The group is required to maintain a maximum gearing ratio of 2.00 times debt-to-equity, failing which this could trigger an event of default from lenders.
There is a possibility that the equity value of the company would fall after the balance sheet has been finalised by auditors.
In addition, we believe that the company’s ability to access capital markets has been materially constrained and its cloudy liquidity position could make it hard to justify the bid prices for the SDHMK 6.300% 09May2022 Corp (USD) and SDHMK 6.997% 12Mar2025 Corp (USD).
In other words, we believe that the recovery value could be even lower than current depressed pricing of around 30-40s. As such, we advise investors to exit from the bonds. – June 9, 2021
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The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
