This article first appeared in The Edge Malaysia Weekly on May 31, 2021 - June 6, 2021
THE Securities Commission Malaysia (SC) is investigating the alleged accounting woes of oil and gas (O&G) giant Serba Dynamik Bhd, following the sudden differences in opinion between the company and its long-time external auditor KPMG.
The SC, in an emailed response to questions on whether it was looking into the issues raised by KPMG and whether the market rumours of a raid at Serba Dinamik’s office were real, says, “Following the submission of the report from Serba Dinamik’s auditors, the Securities Commission has commenced investigations into the matter and secured documents and records from the company last week to assist its investigation.”
While there is talk of other government agencies visiting Serba Dinamik’s premises in Shah Alam as well, this remains conjecture at press time.
Meanwhile, in a brief phone conversation, Serba Dinamik’s managing director and CEO Datuk Mohd Abdul Karim Abdullah laments what he perceives as the unfairness of the whole issue with KPMG. “It’s not fair; we have been transparent, we have been in constant contact with Bursa [Malaysia], our shareholders, [as per] our responsibility.
“They [KPMG] have been our auditors for seven years. Why now, suddenly [have they raised these issues]?” he questions.
“[Serba Dinamik] is intact. We have strong fundamentals; we will ride this out. I’m also bound by the legal framework,” he adds, explaining that he is not at liberty to elaborate on the issues.
Last Friday, Serba Dinamik announced an extraordinary general meeting aimed at removing KPMG and appointing BDO as auditors. In an announcement late Friday, Serba Dinamik also said KPMG questioned sales transactions, trade receivables and material on-site balances. In the crosshairs as well were certain purchases and trade payables, with suppliers having similar addresses and undertaking transactions of between RM60 million and RM96 million, while having only paid-up capital of RM100,000. In total, these transactions amount to RM481 million.
In addition, Serba Dinamik alleged that KPMG had failed to locate a customer and supplier in Bahrain, as the accounting firm had cited the wrong address. This is with regard to total sales transactions of US$101 million and trade receivables balance of US$24 million. Issues with a wrong address are also alleged to have taken place with receivables balances and sales transactions for IT contracts.
Serba Dinamik also said: “The company is not able to substantiate the impact, pending the review by the independent firm. The company takes the view that there is no issue with regard to the legitimacy and existence of the contracts as well as the value that will render any material impact to the financial and operational aspects of the group for the financial year ending June 30, 2021.”
While the news about Serba Dinamik’s issues with KPMG may have taken fund managers and analysts by surprise, many in the O&G industry had been talking about the company’s margins, which are perceived to be high by industry standards.
Back when everything was fine and dandy at Serba Dinamik, none of the fund managers or analysts questioned the company’s margins, with all eyes on the meteoric rise of its shares.
Since its listing in early February at RM1.50, Serba Dinamik’s stock has gained more than 120%, and closed at RM1.61 prior to its suspension. The company’s market capitalisation at its close on Wednesday was about RM6 billion, making it among the largest publicly traded O&G companies after Petronas-controlled entities and Dialog Group Bhd.
To put things in perspective, in FY2020, overseas projects accounted for 75% of Serba Dinamik’s order book of RM18.7 billion and 69% of its FY2020 revenue. More recently, it sponsored Data Knights Acquisition Corp, a special-purpose acquisition company listed on Nasdaq in the US.
“The company plans to leverage its management team’s experience and target the data centres and internet technology sectors, focusing on businesses built on disruptive technologies and business platforms,” Serba Dinamik said when announcing the listing. Its investment in Data Knights was about US$5.85 million (RM24.2 million), and the company was looking to raise as much as US$115 million.
Perhaps these gains, coupled with Serba Dinamik and Abdul Karim being in the news ever so often as well, led to some of the questions being raised. Other than a 26.93% stake in Serba Dinamik, Abdul Karim is also a 32% shareholder in engineering and construction company KPower Bhd and owns 37% of concrete product manufacturer Sarawak Consolidated Industries Bhd.
Datuk Awang Daud Awang Putera, a non-independent non-executive director of Serba Dinamik who ceased to be a substantial shareholder in the company last June, has a 26.79% stake in Minetec Resources Bhd, of which he is the executive chairman. Awang Daud is also executive chairman of Aimflex Bhd, in which he has a 29.03% stake. He ceased to be a substantial shareholder in Sealink International Bhd late last year.
With its officials in the limelight, Serba Dinamik was thrown into the spotlight as well. Last year, the company bagged a turnkey contract worth RM7.7 billion in Abu Dhabi from Block 7 Investments LLC, which has also come under the spotlight, with questions being asked about the awarding company.
A managing director of a publicly traded O&G company says, “I always wonder when a company’s officials are overly concerned about share price, always talking up the prospects … [The high share price] matters only if you are selling [shares in the company].”
Serba Dinamik was listed in early 2017 when oil prices were still low. Brent Crude had come off highs of US$150 per barrel in 2008 and, between January 2011 and June 2014, it averaged US$110 per barrel. It started to taper off, and hit a low of US$29 per barrel in January 2016, averaging US$44 per barrel that year. Things were no better in 2017, after Serba listed its shares.
Nevertheless, the company’s stock has consistently performed, gaining more than 120% since its IPO.
As for the purportedly high margins, checks reveal that Serba Dinamik’s net margins for FY2017 to FY2019 were 11.3%, 11.9% and 11% respectively, which is considerably higher than many other companies that have net margins in the mid-single digits. Some years ago, an O&G executive had remarked that Serba Dinamik’s margins were better than those of the main contractors.
Nevertheless, the managing director of the O&G company says that, as Serba Dinamik has diverse interests, a segment-by-segment analysis is required. “One business segment may do well and have good margins while another is down, but a net margin of 11% is very good,” he says.
On the higher margins, Abdul Karim defends the company’s position, saying it is unfair to compare Serba Dinamik’s margins with those of other companies. “Our margins are high because the work we do is specific, it’s specialised. So, the value is high. Our contracts are usually between two and three years. We add new applications [as we progress through the contract] and use AI [artificial intelligence],” he explains.
For its financial year ended December 2020, Serba Dinamik chalked up net profits of RM631.74 million on the back of RM6.01 billion in revenue. In FY2019, it registered net profits of RM496.64 million from RM4.53 billion in sales.
As at end-December last year, Serba Dinamik had cash and cash equivalents of RM836.35 million. As at end-FY2019, it had cash and cash equivalents of RM1.31 billion.
Trade and other receivables as at end-December 2020 were at RM1.86 billion, up from RM1.26 billion at end-FY2019. Inventories as at end-December 2020 were at RM1.67 billion, up from RM919.56 million at end-December 2019.
A market watcher, formerly the head of research of a local brokerage, says, “Serba Dinamik’s balance sheet shows total equity of RM3.26 billion. It is sitting on net debt of RM3.1 billion, so net gearing is near 100%. Receivables and inventories have jumped significantly. Receivables are up 48% and inventories are up 81%. In 2020, however, revenue was up 33% to RM6 billion while net profit was higher by 27% to RM632 million.”
Of the high receivables, Abdul Karim says in reply to a WhatsApp query, “Compared to the total revenues, it’s acceptable. The Covid-19 lockdown in other countries is posing a real challenge to get prompt payments. [So far, there has been] no indication of bad debts.”
Eyebrows were raised when the company announced in early May that it was changing its financial year-end from Dec 31 to June 30.
The former head of research-turned-market watcher says, “It was only in May 2021 that the company announced it was changing its financial year to June 2021 from December 2020. Its 4Q results ended Dec 31, 2020 were announced on Feb 26. So, making a change so soon does seem odd.”
Abdul Karim explains, “It’s because of Covid-19. We are operating in more than 20 countries around the world; we need time [to get everything together].”
Judging by the reaction from the analyst fraternity that covers the company’s stock, Serba Dinamik seems to be in for a difficult period. AmInvestment Bank’s Alex Goh downgraded the stock from a “buy” to a “sell”, with a target price of RM1.26. Goh’s target price seems bullish compared with Kenanga’s estimate of 95 sen.
Serba Dinamik’s bonds are also under the spotlight.
In FY2019, the company issued two tranches of debt papers — one for US$300 million and another for US$200 million, with a tenure of three years and 5¼ years priced at 6.30% and 6.99% respectively.
The US$300 million debt paper is due in 2022.
A bond trader says, “As the downgrade and assigned rating were quite recent, there would be little opportunity for price discovery in the already-illiquid market for this bond, which is of a lower-rated nature. However, one can assume mark-to-market losses, following the audit issue.”
Serba Dinamik is also understood to be looking at another bond issue of RM800 million, to which Abdul Karim says: “We have to settle things one by one; clear this issue first. The bond [issue] is still in motion, still in discussion.”
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