Serba Dinamik’s O&M segment to see strong growth
KUCHING: Serba Dinamik Holdings Bhd’s (Serba Dinamik) operation and maintenance (O&M) segment is expected to see strong growth, driven by higher maintenance work orders.
According to Affin Hwang Investment Bank Bhd (Affin Hwang) in its initiation coverage, demand for maintenance services in both the oil and gas (O&G) and power generation industries hinges on the level of operational activity.
“For O&G, it would be dependent on the activities on exploration and production platforms and refinery and processing plants.
“For power-generation plants, demand would be dependent on installed power-generating capacity,” Affin Hwang said.
The research arm noted that even under a relatively low oilprice environment, O&M remains a crucial part of the operation to ensure safety and operation efficiency, coupled with the fact that O&M generally makes up a small part of total overall spending.
“Besides, timely maintenance service according to a pre-agreed schedule is important to ensure equipment is able to work through its useful life effectively,” it added.
Affin Hwang thus saw room for business growth on the robust demand for O&M services as the oil price recovers and stabilises, which would result in higher activity levels across the O&G and power-generation industries.
“Furthermore, O&M services are more resilient in nature compared to the rest of the more capital intensive services as O&M generally only makes up a small part of the oil majors’ total spending,” the research arm observed.
“Hence, they are less susceptible to capital expenditure (capex) spending cuts which protect the business against downside risk to a certain extent.”
Lastly, the research arm believed Serba Dinamik has a competitive advantage from the group’s peers through its vast geographical earnings base in the Middle East, Malaysia, Central and Southeast Asia as well as the rest of the countries across the region.
Affin Hwang highlighted that Serba Dinamik is currently trading at a forward financial year 2017 estimate (FY17E) price-earnings (P/E) of 7.6-fold, backed by a strong expected return on equity (ROE) of 27 per cent.
The research arm projected free cash flow to turn positive in FY18, which reinforced its positive view on the company.
Affin Hwang expected a robust FY14-17 earnings per share (EPS) compound annual growth rate (CAGR) of 66 per cent, backed by increased O&M activities, expanding engineering, procurement, construction and commissioning (EPCC) revenue and gross margin of 17.7 per cent.
“Assuming our forecast is met, we do see strong dividend upside with a potential yield of 3.3 per cent,” the research arm said.
“Notwithstanding, there is still potential for future growth apart from the O&M business, as Serba Dinamik is actively expanding its asset ownership to build recurring income streams.”
All in, Affin Hwang initiated its coverage on Serba Dinamik with a ‘buy’ rating.