The Downfall of $SERBADK / 5279 (SERBA DINAMIK HOLDINGS BERHAD)

$SERBADK / 5279 (SERBA DINAMIK HOLDINGS BERHAD), once a powerhouse in the Malaysian stock market, faced a dramatic fall from grace when it was delisted on June 5, 2024, following an accounting scandal. This company, which had been a darling among investors for its low valuations and strong growth narrative, saw its revenues and profits consistently reach new heights, securing numerous contracts along the way. However, when allegations of fraudulent accounting emerged in 2021, its stock price collapsed, leading to significant financial losses.

Why did no one anticipate the risk of accounting fraud? Companies involved in such scandals often project an image that appeals to both institutional and retail investors, concealing the reality until the scandal is exposed, revealing that the impressive contracts and profits were mere fabrications.

Companies entangled in accounting scandals often exhibit several common red flags:

1. Rapid Growth Paired with Rising Debt: From its IPO in 2017 until 2020, Serba Dinamik's revenue and profits consistently broke records. However, the company’s bank loans surged at an alarming rate, leading to severe cash flow issues. Over the years, Serba Dinamik frequently resorted to private placements to manage its mounting debt.

2. Questionable Contracts: On April 15, 2020, during the pandemic, Serba Dinamik secured a RM 7.71 billion contract from the American company BLOCK 7 to build an innovation and academic center in Abu Dhabi, UAE. Given the global economic situation at the time, this contract raised doubts about its legitimacy, especially since the company lacked the operating capital to complete the project.

3. Inflated Receivables and Contract Assets: Both trade receivables and contract assets saw significant increases. While the business appeared to be expanding, collecting payments from customers became increasingly challenging.

4. Unrealistic Profitability During Industry Downturn: The 2020 pandemic led to widespread declines in profits within the oil and gas sector, yet Serba Dinamik’s profits continued to soar. This anomaly seemed counterintuitive and raised suspicions. The phrase "too good to be true" aptly describes Serba Dinamik during this period, as the company’s ability to maintain profitability while the global oil and gas industry struggled defied logic.

When evaluating a company’s fundamentals, investors should always consider the performance of its peers. If a company stands out significantly, there must be a strong underlying reason. However, even the most impressive capabilities are futile in the face of an unfavorable market trend. If an entire industry is in decline, yet one company continues to thrive, investors should critically assess what makes that company shine so brightly in a struggling sector.