Serba Dinamik Holdings Bhd
(Jan 17, RM3.61)
Maintain buy with an unchanged fair value of RM6.50: Concerns have arisen on Serba Dinamik Holdings Bhd (SDHB) since Budget 2019 removed the RM20,000 tax ceiling on Labuan-based companies, which led to it bearing the existing tax rate of 3%.
In cumulative nine months of financial year 2018 (9MFY18), Serba’s effective tax rate was 7.9% as 72% of the group’s revenue was derived from outside of Malaysia, which bears minimal tax rates as its overseas operations are registered in Labuan.
We note that our current FY18F-FY20F effective tax rate assumption of 12% is already higher than Serba’s 9MFY18 rate.
Our tax assumption is similar to 11.9% in FY17 which bore prior year’s tax adjustments and deferred tax provisions. Nevertheless, we have conservatively raised the group’s tax assumption by 2 percentage points (ppts) to 14% for FY19F–FY20F according to the new budget.
However, management expects the continuation of strong revenue growth this year driven by growing demand in the Middle East and Southeast Asia, spearheaded by the United Arab Emirates and Qatar.
Most of the growth will be underpinned by Serba’s operation and maintenance services, which account for 85% of the group’s FY18F revenues. Even the delay in the commencement of the RM560 million EPCC (engineering, procurement, construction and commissioning) contract to build 60mw hydro power plants within the Temenggor and Belum Forest Reserves in Perak from mid of 2018 to the second quarter of 2019 did not have any impact on the group’s FY18F revenue growth of 20%. Instead, the commencement should have a slight incremental boost to our FY19F growth assumptions. Recall that Serba’s outstanding order book of RM7.5 billion during the 3QFY18 analyst briefing has already reached its end-FY18F target, and likely to surpass it in 4QFY18.
Management is now aiming for an outstanding order book of RM10 billion by end-FY19, which translates into an impressive growth of over 30%.
This is achievable given that the current order book of RM7.5 billion represents an even stronger 42% year-on-year (y-o-y) growth from RM5.3 billion at end-FY17. This implies that the group is expecting an FY19F revenue growth of 18% to 20%, above our current estimate of 16%.
Notwithstanding the group’s effective capital commitments of RM1.2 billion, Serba’s net gearing is expected to gradually decline, from 0.7x in FY16 and 0.5x in FY17 to 0.3x–0.4x in FY18F–FY20F due to its growing cash generation while the capital outlays for projects under its asset ownership model and Pengerang Eco-Industrial Park development will be largely funded from the profits of the EPCC contracts which are bundled together with its partners. — AmInvestment Bank, Jan 17