MARC has affirmed its MARC-1_IS/AA-_IS ratings on Serba Dinamik Holdings Berhad’s (Serba Dinamik) RM500 million multi-currency Islamic Commercial Papers Programme and RM1.5 billion Islamic Medium-Term Notes Programme (Sukuk Wakalah) with a combined limit of RM1.5 billion. The outlook on the ratings is stable.

The stable outlook assumes that over the next quarter, the group will reduce its leverage which has increased on the back of new borrowings. Group consolidated borrowings stood at RM2.5 billion as at end-June 2019, up from RM1.7 billion as at end-2018, leading to a gross debt-to-equity (DE) ratio of 1.10x (Net DE: 0.64x). This is expected to reduce to 0.79x by end-2019 when some of the existing short-term borrowings are pared down. Over the next six months, MARC expects the group’s leverage to trend lower to around 0.70x; any substantial increase in debt levels to fund business activities or acquisitions that result in weaker debt metrics from the current levels would trigger downward rating pressure.

The affirmed ratings take into consideration Serba Dinamik’s healthy order book, underpinned by the group’s established position in the operations and maintenance (O&M) of rotating and static equipment both domestically and overseas. The sizeable order book continues to provide strong earnings visibility. Constraining the rating is the group’s extensive reliance on long-term borrowings to fund working capital and undertake business expansion. Additionally, the short-term nature of its contracts exposes the group to contract replenishment risk, although this is mitigated to some extent by the recurrent nature of a significant portion of the contracts and the group’s track record.

Serba Dinamik’s order book has continued to increase, with O&M contracts standing at about RM6.0 billion and engineering, procurement, construction and commissioning (EPCC) contracts amounting to RM2.6 billion as at end-June 2019 (end-March 2018: RM4.2 billion, RM2.0 billion). These contracts provide earnings visibility for the next three years. About 75% of the group’s O&M order book constitutes overseas contracts, particularly from Middle East countries, with the remainder from Petroliam Nasional Berhad (PETRONAS). As an independent service provider, Serba Dinamik generally focuses on securing after-warranty maintenance contracts and has been able to obtain such contracts due to its extensive track record in the maintenance, repair and overhaul (MRO) segment.

Serba Dinamik has continued with its strategy of acquiring minority stakes in project companies with construction contracts or concessions, subsequently seeking to undertake EPCC work on the project and becoming an O&M operator to secure a recurrent income stream. In this regard, it acquired a 25% stake in Sufini Holdings Ltd for USD4.0 million which led to the procurement of EPCC work packages worth USD78.0 million for the construction of a chlor-alkali plant in Tanzania. Serba Dinamik will also be appointed as the O&M operator for a period of 10 years plus five additional years for this project.

Its other major project, the Pengerang Eco Industrial Park (PEIP) which is situated on a 132-acre site in PETRONAS’ RAPID project in Pengerang, is expected to be completed by 2020. With a gross development cost of RM1.4 billion, the project, which will be a one-stop centre for plant and equipment maintenance with a logistics hub, among other services, is being largely funded by proceeds from a private share placement issued in January 2018. As at June 20, 2019 the project is about 33.2% completed.

For 1H2019, the group recorded a higher pre-tax profit of RM268.3 million, a 30.4% y-o-y increase from the corresponding period in the previous year. For 2018, pre-tax profit rose by 26.4% y-o-y to RM437.6 million on the back of higher revenue. Coupled with a fairly low dividend payout of 27%, retained earnings increased by 20.6%. Prospects for strong earnings growth remain based on the group’s order book build-up which would strengthen the group’s capital buffer and mitigate risk from the increased borrowings. Notwithstanding this, cash flow from operations (CFO) remained flat at RM84.3 million in 2018 (2017: RM85.9 million), largely due to higher working capital requirement to support the group’s expanding business. Cash conversion cycle increased to 131 days in 2018 (2017: 106 days), mainly from a higher inventory level. Collection risk remains manageable with past due of more than 30 days standing at 3.0% of trade receivables.

Free cash flow (FCF) reduced further to negative RM467.6 million (2017: RM170.6 million) due to higher capex mainly for the development of service centres in Bintulu and Pengerang as well as for the acquisition of minority stakes in EPCC project companies totalling about RM417.0 million. Funding for the capex was partly derived from equity placements in 2018 and issuance of the sukuk. The capex requirement is expected to moderate over the next two years after the completion of the service centre project in 2020. In 1H2019, the CFO improved to RM59.8 million (1H2018: RM28.6 million) but FCF remained negative.

Contacts:
Chia Kah Yie, +603-2717 2961/ kahyie@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my