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Continued profit growth fails to support Serba Dinamik share price, why?

KUALA LUMPUR (June 28): Serba Dinamik Holdings Bhd, which has been in the limelight due to audit issues that resulted in resignations of its external auditor KPMG plus five independent directors, has continued to achieve earnings growth in the latest quarter ended March 31, 2021.

Nonetheless, this did not lend support to its share price, which plunged to a new record low of 32 sen this morning, from RM1.61 prior to the audit fiasco.

The latest quarterly net profit of RM113.32 million has pushed the oil & gas service firm’s annual net profit to RM745.06 million in the financial period ended March 31, 2021 to a new record high. Quarterly revenue stood at RM1.38 billion, bringing the total to RM7.4 billion.

The financial period comprises five financial quarters as it is changing the financial year end to June 30, 2021 from Dec 31, 2020.

The company’s earnings have been on a steady growth path despite the harsh operating conditions in the past few years due to the collapse of the crude oil and the Covid-19 pandemic. Many of its industry peers suffered badly, including Petroliam Nasional Bhd which booked its first ever annual losses during these challenging times.

At a closer look, Serba Dinamik’s receivables and inventories also piled up, which the group had previously attributed to the Covid-19 pandemic and in anticipation of projects in its pipeline.

Around 85% of Serba Dinamik revenue and gross profit comes from the O&M segment, mainly from the Middle East region such as Qatar, UAE and Oman, followed by Malaysia. Other segments include EPCC, ICT as well as education and training.

It is noted that quarter-on-quarter, Serba Dinamik results were weaker by 43.94% from RM202.15 million in the quarter ended Dec 31, 2020 as contribution from all segments fell.

Quarterly revenue fell 23.8% from RM1.82 billion, which the company said was “mainly due to slower activity in Malaysia given the recent Movement Control Order imposed in several states within the country”.
Cash flow and receivables paint different picture

The audit issues that Serba Dinamik has been embroiled with its external auditor KPMG was that the latter in late May had informed the board on some matters pertaining to certain bills and transactions amounting to RM4.54 billion.

Serba Dinamik’s management claimed that KPMG has blown the “trivie audit issues” out of proportion. Consequently, it took legal action against KPMG. Subsequently, four independent directors last Friday resigned in protest over the company’s decision to sue the auditor.

Back on Serba Dinamik’s financial accounts. Its cash flow statement and balance sheet position however, tell another story.

At end-March 2021, Serba Dinamik cash balances fell to RM1.03 billion, from RM1.31 billion at end-2019.

Despite over RM100 million profit and over RM1 billion in revenue, Serba Dinamik’s net cash flow from operation deteriorated further in the quarter to RM9.75 million at end-March, from RM45.74 million three months prior.

The metric goes negative to RM320.59 million for the 15-month period ended March 31, 2021 when including financing activities interest paid & net repayment on lease liabilities.

Meanwhile, inventories swelled to RM964 million or over 100% in the period, bringing the total to RM1.88 billion. It is up by another RM217 million in the latest quarter.

Trade and receivables expanded by RM665 million or 53% since the end of 2019 to RM1.92 billion as at end-March. But, the amount was up at a much slower rate of RM56.3 million in the quarter under review.

Notably, with the rise in revenue, the group’s receivable days have reduced to 95 days, from 113 days at end-2020.

Serba Dinamik group managing director and largest shareholder Datuk Mohd Abdul Karim Abdullah has pointed out that Covid-19 is posing a real challenge to get prompt payments, although there is no indication of bad debts. The company operates in over 20 countries, he added.

Additionally, trade and payables also rose by RM196.45 million in the same 15-month period to a total of RM656.85 million. It is up by RM125.7 million in the last quarter.

The group also paid out RM172.9 million in dividends in the 15-month period.

Despite the steady revenue and profit growth, the group has funded its cash requirements through other means.

Since the start of 2020, Serba Dinamik has raised RM965.31 million through two private placements, where RM300 million was earmarked to repay borrowings, RM100 million for Teluk Ramunia capex, RM303 million for its projects in Abu Dhabi, and some RM234 million for working capital.

In July 2020, Serba Dinamik also raised RM177 million by selling off its 24.8% in Singapore-listed CSE Global Ltd to Temasek Holdings’ unit Heliconia Capital Management — proceeds of which are also for working capital purposes.

Additionally, the group borrowed more from the banks. Its total borrowings increased by RM635.9 million, to a sum of RM3.98 billion at end-March, from RM3.34 billion.

In the last four years, Serba Dinamik has been growing its annual top and bottom-line by 30.24% and 27.04% respectively between the financial year ended Dec 31, 2017 (FY2017) and the 12-month period ended Dec 31, 2020.

The rise in the group’s debt, receivables and payables, as well as inventories, is concurrent with the rapid expansion of the company over the years, especially into the Middle East where over 60% of its revenue comes from.

That is also partly where Serba Dinamik’s former external auditor KPMG had been unable to verify certain clients and suppliers, as well as sales transactions, trade receivables and material on site balances.

Serba Dinamik in its latest results filing said: “Without prejudice to the ongoing civil suit with KPMG and the allegations therein, to address the market and regulator’s concerns, the special independent review shall proceed as planned.”


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