SERBA DINAMIK HOLDINGS BERHAD - 2018

MARC has assigned final ratings of MARC-1_IS/AA-_IS with a stable outlook to Serba Dinamik Holdings Berhad’s (Serba Dinamik) proposed RM500 million multi-currency Islamic Commercial Papers Programme and RM1.5 billion Islamic Medium-Term Notes Programme (collectively, the Sukuk Wakalah Programmes) with a combined limit of RM1.5 billion. Serba Dinamik is expected to make a first issuance of up to RM500 million under the Sukuk Wakalah Programmes, proceeds of which will be utilised to refinance its existing borrowings and for working capital requirements.

The assigned ratings incorporate Serba Dinamik’s established position in the operations and maintenance (O&M) of rotating and static equipment primarily for the oil and gas industry. The group has a significant market share domestically in this segment and has steadily increased its presence abroad, particularly in the Middle East. The foreign operations provide geographically diverse revenue streams. The ratings also consider Serba Dinamik’s large order book, its stable operating margins and its ability to secure recurrent contracts to provide medium-term earnings visibility. Constraining the ratings are continued pressure on its free cash flow generation mainly due to rapid business expansion and concerns on the potential increase in working capital funding that could increase its borrowings and impact its leverage position.

The stable outlook assumes that Serba Dinamik will maintain its credit metrics in line with its current rating band. Rating triggers for a downgrade are a weakening in the consolidated debt-equity (DE) ratio to 0.7 times on the back of a decline in the group’s business performance and/or industries it is operating in.

As at end-March 2018, Serba Dinamik’s outstanding O&M order book stood at about RM4.2 billion, of which RM1.2 billion (or 28.6%) is domestic and the bulk of the remaining in the Middle East. Its business operations abroad over the years has led to a broad customer base. Serba Dinamik’s domestic order book is dominated by contracts with the PETRONAS group with which it has maintained a strong relationship since 1997. The long-standing relationships with oil and gas operators have enabled the group to maintain a high client retention rate which mitigates renewal risk of its O&M contracts which are typically for a three-year period. MARC also notes that Serba Dinamik has been largely insulated from fluctuations in oil prices due to the oil and gas companies’ need to comply with regulatory and contractual requirements to conduct scheduled and routine maintenance.

The group has increased its involvement in the engineering, procurement, construction and commissioning (EPCC) segment in order to diversify its revenue base and has acquired minority stakes in project companies to seek EPCC contracts. To date, it has acquired stakes in three companies for a total of RM80.2 million. Serba Dinamik is also constructing an O&M centre in its 67-acre Pengerang Eco-Industrial Park that will serve PETRONAS group’s refineries and petrochemical plants in Pengerang, Johor. The group’s business expansion has been supported by proceeds of RM407.1 million from an initial public offering in 2017 and an additional RM427.2 million through a private placement exercise in early 2018.

The capital-raising exercise has strengthened Serba Dinamik’s capital structure with the DE ratio declining to 0.36 times as at end-1Q2018 (2017: 0.51 times). Borrowings stood at RM665.4 million, which were mainly short term to support working capital requirements for its O&M business. The group’s consolidated DE ratio would increase to about 0.63 times post-initial issuance under the Sukuk Wakalah Programmes. Serba Dinamik has exhibited strong revenue growth over the last five years with revenue increasing from about RM500 million in 2013 to about RM2.7 billion in 2017. Operating profit margin has been stable at about 14.0%.

For 1Q2018, Serba Dinamik recorded revenue of RM730.8 million and pre-tax profit of RM96.5 million, while cash flow from operations (CFO) stood at RM11.5 million. The modest CFO has been attributed to high working capital requirements partly due to extended credit terms for its local operations and partly to inventory build-up. The risk of non-collection on trade receivables, which stood at RM771.6 million at end-1Q2018, is tempered by the strength of its domestic clients’ profiles which comprise largely reputable oil and gas companies.

Major Rating Factors

Strengths

• Established player in O&M of rotating and static equipment for the oil and gas industry;
• Earnings visibility from recurrent contracts; and
• Stable operating profit margin.

Challenges/Risks

• Cash flow from operations remains moderate on high inventory purchases; and
• Potentially high working capital requirement for expansion and increasing activity in EPCC segment.