KUALA LUMPUR: UOB Kay Hian Malaysia Research is retaining its hold call for Serba Dinamik
with a new target price of 70 sen and entry at 55 sen as most of the downside has been priced in unless there are more unforeseen events.
In its report on Thursday, the research house said it retained its neutral view on the disputes between the company and its external auditor KPMG.
“Most of the downside is likely to have been priced in, unless KPMG resigns, owners dump shares, or the independent auditor has adverse opinion.
“However, the needed rerating catalysts, which are positive third-party audit review and improving cash flow, will take time. We have downgraded all our earnings forecasts assuming near-term funding may be affected, ” it said.
UOB Kay Hian Research had earlier cited cash flow concerns when Serba Dinamik decided to purchase the Teluk Ramunia Yard.
It said the current price is close to adjusted IPO price of about 56 sen to 60 sen and below the book value per share (BVPS) of 96 sen.
“Serba Dinamik had revealed the matters highlighted by its external auditor (KPMG) and that it requires a special independent review, which we will not be highlighting in this note, though we note they draw similarities to key audit matters done by KPMG’s independent audit in 2019 Annual Report, ” it said.
Serba Dinamik had decided not to remove its external auditorand targets to appoint its independent auditor by June 21.
The company had also said it has responded to KPMG’s matters (dated May 3) on May 6 and as of end-May KPMG had not followed up.
“If there are no updates from KPMG, and Serb DInamik’s independent auditor requires some time to complete its work, there will not be a major near-term re-rating at this juncture.
“Some events that warrant further downside and downgrade to our call includes: a) KPMG decides to resign. A resignation move from an external auditor will mark an event with the most serious ramifications on the company. Auditors can resign if they suspect fraud, malpractice or mismanagement which were unable to be resolved with management;
“b) Serba Dinamik’s owners massively dump their shares, suggesting they have something to hide; or c) independent auditors conclude their accounts with adverse opinion, ” it said.
UOB Kay Hian Research said near-term funding issues may be another uncertainty.
While Serba Dinamik guided the group did not receive negative or stop-flow orders from its bank facilities and business is carrying on as usual, the reputational risk had resulted in derating of its international bonds and rating downgrades from Fitch and S&P.
S&P assumes Serba Dinamik may face difficulties assessing funding (at least until the accounting resolution) and may complicate its ability to refinance RM1.7bil of debt maturities before May 2022.
“Although we assume the funding for local projects (backed by Petronas) is unlikely to face such issues, the risk is greater for overseas projects, especially the two mega projects in Abu Dhabi, ” it added.
The research house also said on behalf of shareholders, it hopes Serba Dinamik will consider (once the latter positively clears its accounting issues): a) slashing dividends to preserve buffer in view of uncertainties, b) reducing companies or fine-tuning a system to allow companies and transactions to be easily traceable and verified by auditors, or else, c) shedding away some operations and asset ownership companies to be simpler and more straightforward.
“This is because due to Serba DInamik’s growth to a global complicated structure it has today, we have to assume there will always be another incident where auditors may raise special audit matters but face insufficient time to verify all of them, ” it said.
