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KUALA LUMPUR (October 8): Serba Dinamik Holdings Bhd has been included in a peer group of the top 50 high-yielding Asian corporate issuers (Asia Corporate HY50) by Fitch Ratings.
In a report released yesterday, Fitch said the Asian high-yield market had been continuously expanding over the past decade, and is now a distinct asset class in its own right. High-yielding issuers (as defined by JPMorgan’s composite rating) on the JPMorgan Asia Credit Index (JACI) already account for 17% of the index’s market capitalization, and 23% if unrated names are included.
Commenting on Serba Dinamik, Fitch said the rating reflects its strong market position in Malaysia, where it was the fourth largest oil and gas equipment and services company by revenue in 2017.
He said the rating is also supported by Serba Dinamik’s strong financial profile, short- and medium-term revenue visibility, and low earnings cyclicality.
Fitch said the company’s smaller operating scale, as well as limited product and end-market diversification relative to other higher-rated peers, limit its rating.
Key rating factors
Fitch said Serba Dinamik had an established reputation for project completion.
Its order book grew more than eight times in the five years to 2018 and reached around RM10 billion in the third quarter of 2019 (3Q19).
“The company’s order books / revenue ratio was approximately 2.5 times as of the end of September 2019, and Fitch expects it to be 1.5 to two times higher in the medium term, providing visibility into revenue. .
“We also believe that Serba Dinamik is well positioned to benefit from supplier consolidation and increased capital investment (capex) in the downstream segment of Malaysian national oil company Petroliam Nasional Bhd (Petronas),” he said.
Fitch also believes that Serba Dinamik’s rating is constrained by the need for capital investments to support its growth, limiting its ability to generate neutral to positive free cash flow.
“However, this is partly offset by the company’s focus on mid-tier customers, which supports its bargaining power and has resulted in industry-leading profit margins,” he said.
On substitution risks, Fitch said Serba Dinamik’s operations and maintenance (O&M) contracts, which account for the majority of its revenues, are generally not exclusive.
He said this exposes the company to the risk of being replaced by competitors, especially those from outside Malaysia.
“However, Fitch believes the risk is mitigated by Serba Dinamik’s operating licenses in different jurisdictions, its long-term relationships with clients, and its track record and reputation in the industry.
“We also believe that substitution risks are likely to decrease 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 (the first nine cumulative months of 2019), and its exposure to the oil and gas sector to 83% from 87%,” he said.
In terms of revenue visibility, Fitch said that Serba Dinamik generally signs two- to five-year contracts for its O&M services, and 1.5- to three-year contracts for engineering, procurement, construction and commissioning projects ( EPCC), which provides some visibility into revenue.
“Serba Dinamik’s maintenance services, which tend to have more resilient demand during industry recessions, partially offset its exposure to the cyclical oil and gas sector, where lower prices lead to reduced activities and expenses. .
“More than 60% of Serba Dinamik’s order book comes from the downstream oil and gas segment, which makes its cash flow less sensitive to the exploration business and subsequently to fluctuations in commodity prices. raw, ”he said.
Fitch said it expects Serba Dinamik’s leverage, after adjusting the key finances of partners to whom Serba Dinamik provides provided financial guarantees, to increase to around 2.7 times by the end of 2020 (end of 2018: 1.9 times) in major working capital needs to satisfy new orders.
At 10:43 a.m. today, Serba Dinamik held steady at RM1.61, with a market capitalization of RM5.46 billion.
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