CREDIT ANALYSIS REPORT

SERBA DINAMIK HOLDINGS BERHAD - 2021

Report ID 6053656 Popularity 168 views 43 downloads 
Report Date May 2021 Product  
Company / Issuer Serba Dinamik Holdings Bhd Sector Industrial Products - Oil & Gas
Price (RM)
Normal: RM500.00        
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Rationale
Rating Action     
MARC has assigned ratings of MARC-1IS/A+IS to Serba Dinamik Holdings Berhad’s (Serba Dinamik) RM500.0 million multi-currency Islamic Commercial Papers Programme and RM1.5 billion Islamic Medium-Term Notes Programme (collectively, sukuk programmes) with a combined limit of RM1.5 billion. The ratings outlook is stable.

Rationale     
The assigned ratings reflect Serba Dinamik’s sizeable operations and maintenance (O&M) orderbook, underpinned by an established track record in the O&M of rotating and static equipment domestically and abroad. The ratings also consider the group’s strong relationship with Petroliam Nasional Berhad (PETRONAS) domestically as well as with other state-owned oil corporations abroad that has enabled the group to maintain steady O&M contract renewals and secure new contracts. The orderbook size has continued to provide earnings visibility. Primarily constraining the ratings are the group’s elevated leverage level, and execution risks associated with its expansion into other businesses. 

Serba Dinamik’s order book in the O&M segment stood at RM5.5 billion as at end-December 2020; its expansion into engineering, procurement, construction and commissioning (EPCC) as well as information and communications technology (ICT) businesses in recent years has bolstered its EPCC and ICT order book to RM10.8 billion and RM2.4 billion as at end-December 2020. Of its EPCC contracts, a key sizeable contract of USD1.8 billion is with Block 7 Investments L.L.C of the United Arab Emirates (UAE) to build an innovation hub in Abu Dhabi. Its O&M segment would remain its core business in the medium term given that these new businesses are at nascent stages of development. For 2020, Serba Dinamik registered strong revenue and pre-tax profit growth of 32.8% y-o-y to RM6.0 billion and 29.6% y-o-y to RM706.3 million, with a steady operating profit margin of 15.1%. 

Group borrowings stood at RM3.9 billion at end-2020, up by 17.8% from the previous year. Borrowings, which have remained high relative to its equity base, were undertaken to fund the group’s working capital and capex requirements in line with the growth of its businesses. A private share placement of RM508.6 million in February 2021 has reduced pressure on its capital structure, leading to a debt-to-equity (DE) ratio of 1.01x (net DE of 0.79x) on a pro forma basis. Its leverage position is expected to remain at current levels over the near term given the high working capital requirement for ongoing projects. Should borrowings increase sharply, the rating agency expects a concomitant increase in equity to support capital structure, without which the rating could come under pressure.

The high working capital requirement will continue to weigh on operating cash flow which stood at a low RM47.9 million in 2020. Coupled with the development cost of service centres in Bintulu and Pengerang as well as funding of the RM320.0 million acquisition of the Teluk Ramunia fabrication yard, free cash flow remained negative. The group’s liquidity remains adequate, with cash and bank balances of RM836.4 million as at end-December 2020 sufficient to cover the current portion of its loans and borrowings of RM807.5 million.

Rating outlook     
The stable outlook assumes that Serba Dinamik will sustain its overall business operations and adhere to financial management that is within expectations over the near term. 

Rating trajectory

Upside scenario     
Any upgrade over the near term is unlikely given the group’s businesses, some of which are at nascent stages of development and are exposed to execution risks. These concerns are compounded by the group’s elevated leverage position. However, on a medium term, any rating upgrade would be considered if its leverage position were to improve substantially about 0.7x on a sustained basis, supported by healthy cash flow metrics that would benefit from scaled back plans on expansion, hitherto funded by borrowings. 

Downward scenario     
Downward pressure on the rating/outlook would materialise if the group encounters execution issues with its new projects that weigh on its liquidity position and/or if leverage metrics were to significantly weaken.

Key strengths
Established player in O&M of rotating and static equipment 
Sizeable order book provides earnings visibility
Fairly diverse client base mitigates contract renewal risk

Key risks
Elevated leveraged position due to debt-funded rapid growth
Increased operational risk from shift into new businesses

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