MARC has assigned ratings of MARC-1IS/A+IS to Serba Dinamik Holdings Berhad’s (Serba Dinamik) RM500.0 million multi-currency Islamic Commerical Papers Programme and RM1.5 billion Islamic Medium-Term Notes Programme with a combined limit of RM1.5 billion. The ratings outlook is stable. MARC had previously rated the same programmes; following an early redemption of the outstanding and at the issuer’s request, the ratings of MARC-1IS/AA-IS were withdrawn in December 2019.
The assigned ratings reflect Serba Dinamik’s sizeable operations and maintenance (O&M) order book, underpinned by an established track record in the O&M of rotating and static equipment domestically and abroad. The ratings also consider the group’s strong relationship with PETRONAS domestically as well as with other state-owned oil corporations abroad that has enabled the group to maintain steady O&M contract renewals and secure new contracts. Primarily constraining the ratings are the group’s elevated leverage level, and execution risks associated with its expansion into other businesses.
Serba Dinamik’s order book in the O&M segment stood at RM5.5 billion as at end-December 2020; its expansion into engineering, procurement, construction and commissioning (EPCC) and information and communications technology (ICT) businesses in recent years has bolstered its EPCC and ICT order book to RM10.8 billion and RM2.4 billion as at end-December 2020. Its O&M segment would remain its core business in the medium term given that these new businesses are at nascent stages of development. For 2020, Serba Dinamik registered strong revenue and pre-tax profit growth of 32.8% y-o-y to RM6.0 billion and 29.6% y-o-y to RM706.3 million, with a steady operating profit margin of 15.1%.
Group borrowings increased by 17.8% y-o-y to RM3.9 billion at end-2020 to fund working capital and capex requirements in line with the growth of its businesses. A private share placement of RM508.6 million in February 2021 has reduced pressure on its capital structure, leading to a debt-to-equity (DE) ratio of 1.01x (net DE of 0.79x) on a pro forma basis. Its leverage position is expected to remain at current levels over the near term given the high working capital requirement for ongoing projects. Should borrowings increase sharply, the rating agency expects a concomitant increase in equity to support capital structure, without which the ratings could come under pressure.
The high working capital requirement will continue to weigh on operating cash flow which stood at a low RM47.9 million in 2020. The group’s liquidity remains adequate, with cash and bank balances of RM836.4 million as at end-December 2020 sufficient to cover the current portion of its loans and borrowings of RM807.5 million.