Investment Highlights

• We maintain BUY on Deleum with an unchanged 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.

• Our forecasts are maintained as we view Deleum’s 1QFY22 core net profit (CNP) of RM4.1mil as generally within expectations, despite accounting for only 14% of our FY22F net profit and street’s estimates. This is on expectations of a pick-up over the next 3 quarters as 1Q tends to be seasonally weaker amid slower activity levels as clients adjust budgets and spending capacity. To put into perspective, 1HFY21 CNP of RM7.2mil contributed only 27% of FY21 CNP of RM26.2mil.

• YoY, while 1QFY22 revenue increased 7% from higher contribution across all its operating segments, CNP, excluding a RM2.1mil write-back of trade receivable impairment loss and RM2mil gains on the disposal of plant and equipment, was lower by 27% from a slightly weaker gross profit margin of 27% (vs. 29% in 1QFY21), arising from unfavourable sales mix, and a 12%-point increase in effective tax rate to 34%.

• Power & machinery’s share of 1QFY22 pretax profit slid to 57% from 89% in 1QFY21 on higher operating costs and partly from oilfield services rising to 33% from just 7% previously and integrated corrosion solution to 10% from negligible.

• QoQ, Deleum’s turnover dropped 46% YoY largely from seasonally lower activities, largely eroding EBITDA margin by 2% points to 14.5% and consequently driving down net profit by 78%.

• Even so, we expect a stronger subsequent quarter as the group’s outstanding order book slightly increased by 7% QoQ to RM400mil (from RM375mil in end-2021) while tenders substantially rose by 38% to RM400mil from RM290mil previously.

• Deleum’s 1QFY22 net cash balance of RM177mil already represents 70% 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 endFY24F.

• Deleum is currently trading at an unjustified FY22F PE of 8.4x, 35% below the average sector’s 12x. 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 decent dividend yield of 3.5%.

Source: AmInvest Research - 30 May 2022