Serba Dinamik’s Laos investment seen as positive

Serba Dinamik Holdings Bhd (Oct 17, RM4.18) 

Maintain buy with an unchanged fair value (FV) of RM6.50: We maintain our “buy” coverage on Serba Dinamik Holdings Bhd with unchanged forecasts and FV of RM6.50 per share based on sum of parts, which implies a financial year 2019 forecast (FY19F) price-earnings ratio (PER) of 20 times, almost half of Dialog’s 36 times, the company’s closest peer in Malaysia. 

Serba Dinamik has entered into a share sale and purchase agreement to acquire a 49% equity stake in a 30 megawatt (mw) hydropower concession in Laos called OHP Ventures Inc for US$800,000 (RM3.32 million). OHP Ventures has a joint development agreement with Thavone Athsamouth dated Jan 9, 2018 to develop, finance, construct, commission, operate and maintain two mini hydro installations/projects with an aggregate capacity of 30mw in the district of Houaphan, Laos. The project commenced in July 2018 with completion expected by January 2022. 

OHP Ventures owns 70% of the equity in Nam Taep 1.2.3 Hydropower Co Ltd (NT), the concessionaire for the two power purchase agreements (PPA) with a tenure of 25 years with Électricité du Laos, which will buy the net electrical output generated from the 3x5mw Nam Taep 1 and 3x5mw Nam Taep 2 hydropower energy-generating facilities being constructed at Ban Nam Taep and Ban Nameuang, Xam Tai district, Houaphan province in Laos.

This development, which was indicated in our initiation report last Wednesday, is not a surprise. Recall that Serba Dinamik has secured a US$66 million engineering, procurement, construction and commissioning (EPCC) contract on July 19, 2018 with NT to build the hydropower facilities. Based on Serba Dinamik’s effective 34.3% stake in the hydropower dam and 20:80 equity-to-debt financing, we estimate that it would only need to raise US$5 million in equity for this project. 

Assuming a 15% gross profit margin from the EPCC contract translates into RM10 million — two times the equity portion. Hence, we are positive on this investment, which could generate an NPV of US$24 million, which translates into 2% of Serba Dinamik’s market capitalisation, based on the group’s project internal rate of return hurdle rate of 15%. With this Laos project raising the group’s gross power capacity by 33% to 119.9mw, Serba Dinamik group managing director Datuk Mohd Abdul Karim Abdullah has previously said the group aims to further expand to 200mw under the group’s sustainable asset ownership strategy. We understand that the Laos project could be expanded by another 10mw to 40mw.

Despite the group’s effective capital commitment of RM1.2 billion, Serba Dinamik’s net gearing is expected to gradually decline, from 0.7 times in FY16 and 0.5 times in FY17 to a healthier 0.3 times to 0.4 times in FY18F to FY20F. This stems from its growing cash generation while the capital outlays for projects under its asset ownership model will be largely funded by profits of EPCC contracts which are bundled together with the group’s partners.

With Brent crude oil prices trading above US$80 per barrel, Serba Dinamik is currently trading at a grossly undervalued FY19F PER of 12 times versus over 20 times for Dialog, MMHE and Sapura Energy. — AmInvestment Bank, Oct 17

This article first appeared in The Edge Financial Daily, on Oct 18, 2018.

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