SERBA Dinamik Holdings Bhd’s earnings are sufficient to cover the fixed costs of the Teluk Ramunia (TR) offshore fabrication yard, said Affin Hwang Capital.
The yard, recently acquired from Petronas for RM320 mil, is near the Pengerang Integrated Complex (PIC) and is crucial for the group to venture into the offshore fabrication space. Petronas disposed of the yard as it stands idle following the completion of Petronas’ PIC work.
“Completing this yard acquisition would see Serba qualify to bid for offshore fabricators work and other various works. This would allow Serba to compete with Sapura Energy and MMHE, which have traditionally been in the offshore fabrication space,” said Affin Hwang Capital analyst Tan Jianyuan.
“Although both their yard capacities are double the size of TR, we believe Serba has the advantage over Sapura due to a lower cost structure,” added Tan.
Tan also expects an incremental depreciation of RM6 mil, and a finance cost of more than RM11 mil, on the assumption that 70% of the yard is financed by debt.
“The combined cost would only make up 2.8% of our 2021E earnings projection, which is immaterial to Serba’s earnings. We believe Serba’s strong profit and loss statement can absorb this cost well and on the upside, benefit with new contracts to materialise in the next 12-16 months, with an estimated RM2 bil prospective tenders in the pipeline,” said Tan.
Tan has also gathered that the acquisition has raised a few concerns, but believes that Serba’s track record of execution and securing new contracts could help turn around the yard.
At the same time, despite only being at the half-year mark, Serba has already exceeded its previous year-end order book target of RM15 bil, potentially reaching up to RM19 bil based on prospective tenders.
This follows the group securing a US$1.78 bil (RM7.63 bil) engineering, procurement, construction and commissioning (EPCC) project in Abu Dhabi in April, which has lifted the order book to a historical high of RM17 bil.
“With this contract, the EPCC order book has surpassed the operations and maintenance (O&M) segment for the first time since its listing in 2017 with a 51:40 split, effectively transforming the group into the engineering solution company as Serba has always branded itself to be,” said.
However, ongoing Covid-19 restrictions have delayed construction progress for the water treatment plant in Terengganu and the Tanzania chlor-alkali plant, with deadlines pushed back to May 20221 and September 2021 respectively, from the initial 2Q20 timeline.
The Turkmenistan supervisory control and data acquisition (SCADA) project is also delayed until 2021 due to the ongoing travel restrictions, though Serba’s management has guided otherwise.
The delayed projects see Tan lowering 2020 estimated earnings per share for Serba by 6%, which leads to a revised earnings forecast 9% below consensus. However, this has yet to factor in the recently secured Abu Dhabi contract, which makes up 40% of the group’s order book.
Affin Hwang Capital maintains a buy call on Serba, with a lower target price of RM2.10 from a previous RM2.15, pegged to a 12x price to earnings ratio estimate for FY21.
At the end of the morning’s trading, Serba’s shares were at RM1.70, up 2 sen, with 5.59 million shares traded. – July 2, 2020
