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Serba Dinamik (5279)
Current price: RM1.60
Market cap: RM4.9 billion
Average consensus’ target price: RM2.25

Why should BUY Serba Dinamik (Serbadk)?
  1. Serbadk's share price has been unfairly traded at around 8x forward PE ratio or 10x trailing PE ratio. It should be ’at least’ be traded at or more than 13x PE ratio (3-year average historical PE ratio) for its big-cap market cap size status. Its market cap size is even far bigger than Sapnrg! Serbadk is just the second behind Petronas Dagangan in terms of the market cap size in O&G industry!, whom has currently been trading at trailing PE ratio of 24x!
  2. Serbadk's business is a recession-proof nature due to its recurring income because of maintenance services jobs nature, non-related oil EPCC jobs and backed by massive orderbook of RM17 billion, comprises local and the Middle East projects. This massive orderbook is more than enough to provide earnings visibility this year and the next 2 years! The company has been allowed to operate during the MCO.
  3. As of April 2020, the company has secured RM8.6 billion projects this year after surprisingly secured RM7.7 billion Abu Dhabi innovation hub project (not O&G related project) recently despite current market turbulent and is expected to secure more projects in the next coming months this year!
  4. Unlike Hibiscus, Serbadk has NO impact from the fluctuations in oil prices and even a Trump-China war to impose tariff. In fact, a global recession will not give any impact to Serbadk's defensive nature business. Although there could be slightly lower profit margin due to current oil market turmoil BUT is already expected and still manageable due to better cost management!
  5. Unlike other O&G stocks, Serbadk has NO impact from the potential cut in Oil Majors’ (including Petronas) capex because its maintenance services jobs are under opex. It is unlikely to see reduction in Oil Majors’ opex due to the need to maintain the O&G plants.
  6. Post-private placement, its net gearing would reduce to 0.6x from 0.9x and provide more working capital capacity! In fact, negative knee-jerk reaction in price has priced in the minimal impact of earnings dilution and pricing for placement!
  7. Therefore, no more bad news. All negatives have been priced in. The stock is poised for the rally to reflect its strong fundamental and a forward 13x PE ratio target at least from current 8x!
  8. FY20 earnings are still on track with analysts/consensus' forecast to chart another all-time record profit height of RM583 million vs. RM496 million last year.

Its 1QFY20 results to be announced in this May is expected to report stronger earnings growth of 7% to 21% at RM120 million - RM135 million from RM112 million in 1QFY19. However, it could be lower than 4QFY19 of RM140 million due to the seasonal factor as the 4Q is normally the best quarter.

From a technical perspective, the stock is in Wave 2 of Elliot Wave, which is in consolidation phase. The stock is also in bullish flag pattern (in purple circle highlight) and is poised for further rally. Should the stock break and close above this flag resistance of RM1.78, the stock will likely trade higher to RM2.16 in the form of Wave 3. DMI+ (blue line) has pointed upwards, which means buying momentum has started. As long as ADX (pink line) still below DMI+ and below 60, the stock still has a huge potential upside.


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