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Bigger IPOs in 2017

THE impending listing of Serba Dinamik Holdings Bhd, an engineering solutions provider in the oil and gas (O&G) and power sectors, will likely pave the way for a bigger initial public offering (IPO) market in 2017, more so if Eco World International Bhd (EWI) joins the fray.

This year, less than RM1bil was raised from the 11 IPOs on Bursa Malaysia, the lowest figure since the global financial crisis in 2008-2009. The figure is a far cry from the RM4.7bil and RM4.1bil raised in 2015 and 2014, respectively.

Serba Dinamik, which has received approval to list, is said to be looking to raise more than RM600mil. EWI, which industry sources say is looking to list in 2017, is expected to raise more than RM2bil.

Serba Dinamik’s core activity is providing engineering solutions to the O&G and power-generation industries with operational facilities in Malaysia, Indonesia, the United Arab Emirates, Bahrain and the United Kingdom.

“Serba Dinamik is seeking to secure between 12 and 14 times its historical financial year 2015 (FY15) earnings in its IPO. Companies such as Deleum Bhd would be a close comparison for Serba Dinamik’s business,” an analyst says.

Deleum is currently trading at a price earnings (PE) multiple of 13.3 times its 2015 earnings with a market capitalisation of RM368mil, according to data by Bloomberg.

When contacted, Serba Dinamik group chief executive officer Datuk Dr M.A. Karim Abdullah says the company is hoping to list on Bursa Malaysia by February next year with a market capitalisation of RM2bil.

“The listing of Serba Dinamik is timely, as we expect the O&G sector to be better by next year on the back of the recent Organisation of the Petroleum Exporting Countries’ decision to cut its crude oil production that would increase the demand for services,” he says.

According to Serba Dinamik’s draft prospectus, the company plans to utilise the bulk of its IPO proceeds to expand its operations in Sarawak and power plant projects in Sabah and Indonesia, and debt repayment.

Serba Dinamik registered revenues of RM532.2mil, RM755.7mil and RM1.4bil for FY13, FY14 and FY15, respectively. Its profit after tax came in at RM61.6mil in FY13, RM67.4mil in FY14 and RM156.6mil in FY15. Its profit margins for FY13, FY14 and FY15 are 11.5%, 8.9% and 11.2%, respectively.

Karim says that about 60% of Serba Dinamik’s revenue is generated from its operations in the Middle East, while the remaining 40% is from local O&G activities.

“During the downtime of the O&G sector, Serba Dinamik was able to maintain its profitability mainly due to our exposure in oil field maintenance services and operations in the Middle East,” he says.

Karim, who is also one of the co-founders, owns about 35% in Serba Dinamik. Post-listing, his stake in the company will be reduced to between 26% and 28%.

The other major shareholder includes Cahya Mata Sarawak Bhd’s private equity arm CMS Opus PE Sdn Bhd, which has about a 16.1% stake in Serba Dinamik. Post-listing, the firm is expected to hold about 6.4% in Serba Dinamik.

Karim says Serba Dinamik’s planned expansion in Sarawak is to tap into various development projects in the state such as in Samalaju and O&G activities.

“We are also looking to establish a new fabrication facility to support our current fabrication jobs for the Refinery and Petrochemical Integrated Development project and tap into potential projects in the Pengerang Integrated Petroleum Complex in Johor,” he adds.

Serba Dinamik is also in the power plant business, of which the company is currently building three power plants with an installed capacity of almost 30MW in Sabah costing about RM218mil. The company owns a 30% stake in the project, which is expected to be completed by the end of 2017.

It has secured a contract to operate as well as maintain the three hydropower plants for 21 years.

In addition, the company is involved in the development of small gas power plants and water utilities in East Kalimantan.

“Our internal growth plan in the next two to three years is to have a recurring income of 15%-20% of our revenue,” Karim says.

Karim started the company back in 1993, specialising in “plant turnarounds” for the O&G and power sectors.

“After graduating from university in mechanical engineering, I joined a local O&G company as maintenance engineer. But I wasn’t happy because I spent a lot of time in the office planning,” he says.

He then started Serba Dinamik with money raised with two other shareholders, and set up office in Sarawak.

IPO details

Market observers reckon that the listing of Serba Dinamik would be timely, with the better outlook in the O&G sector next year, as well as the company’s exposure to power plant activities in Sabah and Sarawak.

Serba Dinamik is seeking a listing on the Main Market of Bursa Malaysia in February next year. Its IPO will involve 389.4 million shares, of which is an offer for sale of up to 118 million existing shares and 271.4 million new shares.

Large IPOs, raising more than RM500mil, didn’t take off this year in Malaysia. For instance, in Ranhill Holdings Bhd’s case, the IPO was undersubscribed while several planned IPOs such as Ekuiti Nasional Bhd’s education arm Ilmu Education Group were shelved in light of volatile market conditions.

“Among the uncertainties that have loomed over the market, which in turn have deterred IPOs, include volatile crude oil prices, the United States presidential election, Brexit and local political uncertainty. The market has already priced in these factors and we will see a good number of companies looking for IPOs on Bursa Malaysia over the next 12 months,” says an investment banker.

The impact of the softer market has also seen IPOs being priced at lower PE ratios as compared to two years ago.

Notably, some of the IPOs that took place this year were priced at single-digit PEs, such as Dancomech Holdings Bhd and the upcoming listing of Rhone Ma Holdings Bhd, which is lower than previous years when the broader market was better. One exception is Bison Consolidated Bhd, which listed at a PE ratio of 25 times its historical earnings.

“At the current market conditions, some investors would prefer to take the wait-and-see approach while some see it as an opportunity to find better-valued companies whose shares have plummeted as compared to new shares that generally demand higher valuations,” says an analyst.

Despite the sluggish fund-raising activities, interestingly, small-to-medium-sized IPOs have been doing fairly well this year – an indication that the market is hungry for new investment ideas.

“For example, Dancomech, which was listed this year, has significantly outperformed the market. Its share price has doubled from its IPO price. This proves that there is real investor appetite out there for the right stock themes and ideas,” says MIDF Amanah Investment Bank director of corporate investment banking Sherilyn Foong.


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