Thursday, August 5, 2021

AmResearch raises equity risks as Serba denies RPT in Abu Dhabi job

ON the back of potential provisions arising from audit concerns raised by KPMG amid deteriorating balance sheet risks, AmResearch has retained its “sell” rating on Serba Dinamik Holdings Bhd with a lower fair value of 53 sen/share (from 65 sen/share previously).

The target price which is pegged to a 40% discount to CY2020 net book value (NBV) of 88 sen/share is also reflective of the research house’s neutral three-star ESG (environment, social and governance) rating of the company.

“Until the (independent) review is completed together with the audit finalisation and issuance of the group’s annual report by Oct 31 this year, we expect negative market speculations to continue percolating and impact the share price which could last up to four more months,” opined analyst Alex Goh in a company update.

“In our view, Serba Dinamik’s price-to-book value (PBV) of 0.7 times appears precarious pending the outcome of the special audit together with higher capital requirements from its overseas investments.”

Even as the global integrated oil & gas (O&G) service provider has denied any related party interest in its US$1.8 bil (RM7.4 bil) Block 7 Investments project in Abu Dhabi, United Arab Emirates (UAE), AmResearch has raised its concern over the project’s viability.

“Besides the potential construction earnings, Serba’s equity stake aims to position the group in securing facilities management services for recurring maintenance and upkeep of the project upon completion,” noted the research house.

“While this four-year project was set to commence on May 14 last year, it remains at conceptual master planning design phase and awaiting approval from Abu Dhabi’s authorities.”

Although the group’s private placement of 337 million shares at RM1.51/share in January this year is expected to cut the company’s net gearing to 69% from 95% as of Dec 31, 2020, the group will again require fresh equity from the huge Block 7 investment, according to AmResearch.

“Assuming a 50:50 project equity-to-debt ratio, we estimate that Serba would need to raise RM1.8 bil cash or 81% of its current market cap,” projected the research house.

“As such, we are negative on this fresh revelation as banks may be wary of extending further credit and debt facilities following issues raised by its auditor.”

Additionally, AmResearch also expressed uncertainty if Serba Dinamik intends to become a strategic partner in the US$350 mil (RM1.5 bil) project secured from Future Digital Data Systems LLC in August 2020 to engineer, procure and construct a data centre and other related facilities, infrastructure and landscaping in Abu Dhabi.

“At this stage, this may also exacerbate additional capital requirements,” added the research house.

Above all else, AmResearch said KMPG has highlighted to Serba Dinamik’s board of its inability to verify sales transactions of RM2.3 bil and trade receivables of RM652 mil for 11 customers for the period under audit.

“(The) management said that Serba has secured cash proceeds of up to 72% as of March 31, 2021 and up to 90% to date from those sales,” explained the research house. “However, as onsite materials of RM569 mil (81% of FY2021F net profit) have yet to be confirmed by the auditor, we believe that there may be risks for provisions or impairments.”

At 10.30am, Serba Dinamik was down 1.5 sen or 2.5% to 58.5 sen with 60.65 million shares traded, thus valuing the company at RM2.18 bil. – June 22, 2021

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