KUALA LUMPUR (Oct 8): Serba Dinamik Holdings Bhd has been named in a peer group of the top 50 Asian high-yield corporate issuers (Asia Corporate HY50) by Fitch Ratings.
In a report released Oct 7, Fitch said the Asian high-yield market has been expanding continuously over the last decade, and is now a distinct asset class in its own right. High-yield issuers (as defined by JP Morgan's composite rating) in the JP Morgan Asia Credit Index (JACI) already account for 17% of the market capitalisation of the index - and 23% if including unrated names.
Commenting on Serba Dinamik, Fitch said the rating reflects its strong market position in Malaysia, where it was the fourth-largest oil and gas service and equipment company by revenue in 2017.
It said the rating is also supported by Serba Dinamik's solid financial profile, short- to medium-term revenue visibility and low earnings cyclicality.
Fitch said the company's smaller operating scale and limited product and end-market diversification relative to other higher-rated peers constrains its rating.
Key rating drivers
Fitch said Serba Dinamik has an established reputation for project completion.
Its order book has grown by more than eight-fold in the five years to 2018 and reached around RM10 billion by 3Q19.
“The company's order book/revenue ratio was about 2.5x at end-September 2019 and Fitch expects it to be at 1.5x-2x in the medium term, providing revenue visibility.
“We also believe Serba Dinamik is well-positioned to benefit from vendor consolidation and rising capex in the downstream segment by Malaysian national oil company Petroliam Nasional Berhad,” it said.
Fitch also believes Serba Dinamik's rating is constrained by its small operating scale, its limited product and end-market diversification relative to Fitch-rated peers, and the need for capex to support its growth, which limits its ability to generate a neutral-to-positive free cash flow (FCF).
“Nevertheless, this is partly compensated by the company's focus on mid-tier clients, which supports its bargaining power and has translated into industry-leading profit margins,” it said.
On substitution risks, Fitch said Serba Dinamik's operation and maintenance (O&M) contracts, which account for the majority of revenue, are typically non-exclusive.
It said this exposes the company to the risk that it may be substituted by competitors, especially those from outside Malaysia.
“Nevertheless, Fitch believes the risk is mitigated by the operating licences Serba Dinamik holds in different jurisdictions, its long-term client relationships and its track record and reputation in the industry.
“We also believe substitution risks are likely to decline as the company diversifies its customers and end-markets.
“Serba Dinamik's revenue concentration in Malaysia fell to 29% from 55% between 2013 and 9M19, and its exposure in the oil and gas sector to 83% from 87%,” it said.
On revenue visibility, Fitch said Serba Dinamik typically enters into two- to five-year contracts for its O&M services and 1.5-year to three-year contracts for engineering, procurement, construction and commissioning (EPCC) projects, which provides some revenue visibility.
“Serba Dinamik's maintenance services, which tend to have more resilient demand during industry downturns, partly offset its exposure to the cyclical oil and gas sector, where lower prices lead to curtailment in activities and spending.
“Over 60% of Serba Dinamik's order book is from the downstream oil and gas segment, which makes its cash flow less sensitive to the exploration business and, subsequently, to commodity price fluctuations,” it said.
Fitch said it expects Serba Dinamik's leverage, after adjusting for the key financials of associates to which Serba Dinamik provides proportionate financial guarantees, to increase to around 2.7x by end-2020 (end-2018: 1.9x) on higher working-capital needs to fulfil new orders.
At 10.43am, Serba Dinamik was flat at RM1.61, for a market capitalisation of RM5.46 billion.