Investment Highlights

• We maintain BUY on Deleum with a slightly higher fair value of RM1.33/share (from RM1.26/share previously), pegged to a FY23F PE of 12x – line with Malaysian oil & gas (O&G) operators’ average. Our fair value also implies an unchanged 3-star ESG rating with the uplift of tender suspension by Petronas on its integrated corrosion solution (ICS) operations.

• We raise FY23F/FY24F/FY25F earnings by 6%-8% to account for higher sales growth stemming from a resilient orderbook replenishment outlook.

• Deleum’s 1QFY23 core net profit (CNP) of RM9.1mil was above expectations, making up 22% of our FY23F earnings and 18% of street’s. As a comparison, 1Q on average represented 12% of full-year earnings over the last 3 years.

• YoY, 1QFY23 revenue grew 20% YoY to RM123mil on the back of stronger sales recorded from the Power & Machinery (P&M) segment, which more than mitigated declining contributions from other segments. In addition to the higher revenue, 1QFY23 CNP more than doubled YoY as a result of higher profit margins as well as 14%-point decrease in effective tax rate to 20% (from 34% in 1QFY22).

• QoQ, Deleum’s 1QFY23 CNP fell by 48% mainly due to a 61% drop in revenue coupled with higher operating expenses, despite a higher share of results from joint ventures and associates as well as a 4%-point drop in effective rate.

• P&M contributes 79% of 1QFY23 group EBIT, followed by oilfield services at 19% and integrated corrosion solutions at 2%. We note that the integrated corrosion solutions segment posted minimal sales and earnings in 1QFY23 due to depleted outstanding works while awaiting further job awards following the uplift of suspension by Petronas.

• However, we understand that outstanding orderbook improved to RM552mil as at the end of 1QFY23, up by an impressive 32% QoQ from RM396mil in end-4QFY22 backed by robust job replenishments. Meanwhile, its tender book also remains sturdy at RM324mil, which signals further potential job wins amid elevated domestic oil and gas activities.

• Deleum’s 1QFY23 net cash balance of RM198mil already represents 53% of its current market cap. Based on the group’s earnings trajectory, we estimate that its cash balance will almost rival its current market cap by end-FY25F.

• Deleum is currently trading at an unjustified FY23F PE of 8x, 33% below the sector average of 12x. Stripping out the group’s net cash from the market cap, the stock trades at a bargain FY23F PE of only 5x while offering a compelling dividend yield of 7%.

Source: AmInvest Research - 31 May 2023