KUCHING: Serba Dinamik Holdings Bhd (Serba Dinamik) is reducing its reliance on the oil and gas (O&G) sector with engineering, procurement, and construction (EPC) services, power and IT projects, the research team at AmInvestment Bank Bhd (AmInvestment) said.

Following a teleconference with the group, the research team said: “While O&G remains a core business for the group’s operation and maintenance division, management is intentionally reducing Serba’s reliance on this sector with EPC, power and IT projects.”

Currently, it noted that only 45 per cent of Serba Dinamik’s outstanding order book of RM17 billion, which is already ahead of its financial year 2020 (FY20) target of RM15 billion, stems from O&G.

“Our forecasts are maintained for now as a potential increase of 16 to 18 per cent in FY21F to FY22F earnings per share (EPS) from the recent US$1.8 billion (RM7.7 billion) contract to design, EPC an innovation hub, academic campus, apartments, hotels and IT centre over four years in Abu Dhabi, the UAE could be partially offset by a decline in Operation & Maintenance (O&M) revenue growth due to the Coronavirus Disease 2019 (Covid-19) pandemic amid a precipitous decline in oil prices and demand,” AmInvestment said.

On its performance, the research team said since the start of the Covid-19 pandemic in February this year, the group has not experienced any requests from clients to terminate contracts or renegotiate prices. Also, there have been no requests to delay maintenance scheduled or work progress.

“While the movement control order in Malaysia and restrictions in the Middle East have slightly delayed the group’s work productivity, management does not expect any substantive impact to overall operational costs at this juncture,” it said.

It also noted that the UAE construction project’s risks are mitigated by the capping of late completion penalty to 10 per cent of contract value, which is below the group’s expected gross margin target of 12 per cent.

“Additionally, management is confident of delivery within four years for a usual three-year project commencing on May 14, 2020 given the group’s network of contractors, suppliers, consultants and authorities built up over 16 years of working experience in Abu Dhabi and 18 years in the Middle East,” it added.

All in, AmInvestment maintained its ‘sell’ rating. It explained: “With FY20F net gearing expected to reach 0.9-folds, the group’s cap of one-fold may not be achievable with additional working capital needs of up to RM600 million from the UAE job.

“Despite its recurring income profile, the high gearing translates to a low FY20F PE of only nine-folds compared with its closest peer Dialog Group’s 28-folds.”

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