Investment Highlights

• We initiate coverage on Deleum, assigning a fair value of RM0.90/share, pegged to FY22F PE of 12x together with a 3% discount to our ESG rating of 2 stars given that one of its core operations is still blacklisted from Petronas’ tenders. Our earnings multiple is based on the average Malaysian oil & gas operators’ CY22F PE.

• Following the decimation of multiple O&G operators during the 2015–2017 oil price collapse and Serba Dinamik’s accounting issues, the few remaining peers to Deleum’s business include Dialog Group’s specialist product and chemical services.

• Deleum’s business venture has progressed from merely an agent of equipment/services providers to joint ventures, partnerships and self-operated operations, classified into 3 main segments: power & machinery (P&M), which accounts for 70% of FY21 revenue, oilfield services at 19% and integrated corrosion solution 11%.

• Deleum plans to ramp up its niche chemical solutions business, supported by a new CEO with a long working experience with Halliburton, to target offshore brownfield and mature upstream assets in Southeast Asia.

• Currently, Deleum is appealing against Petronas’ suspension on its anti-corrosion operations and hopes to be lifted from the blacklist by the end of this year, having implemented the necessary measures to prevent a recurrence.

• QoQ, the group’s 4QFY21 core net profit of RM19mil was a turnaround from a slight loss of RM1mil in 3QFY21, underpinned by higher Indonesia-based operations which are unaffected by the ban.

• For Deleum to generate a FY21 core net profit, albeit a 38% YoY drop, during a ban on one of the group’s core business amid an unprecedented downturn during the Covid-19 pandemic is commendable given that major EPCIC players such as Malaysia Marine & Heavy Engineering Holdings and Sapura Energy suffered substantive FY20–FY21 losses.

• From a dampened FY21 earnings base, we are projecting a robust FY21–FY24F compounded average EPS growth of 12.5% vs 10.2% for Dialog, which has a much larger service revenue base positioned in a more integrated value chain.

• Deleum’s end-FY21 net cash balance of RM162mil already accounts for 66% 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-FY24F.

• Deleum is currently trading at an unjustified FY22F PE of 8.2x, 35% below the average sector’s 12.6x. Stripping out the group’s net cash from the market cap, the stock trades at a bargain FY22F PE of only 3x while offering a compelling dividend yield of 3.6%.

Source: AmInvest Research - 14 Apr 2022