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.

• We maintain our forecasts as Deleum’s 1HFY22 core net profit (CNP) of RM12mil (+78% YoY), which excludes RM2.5mil writeback of trade receivable impairments and RM2mil gain on plant & equipment disposals, is largely within expectations despite accounting for only 40% of our FY22F net profit and 48% of street’s estimates. This is in anticipation of a pick-up over the next 2 quarters as the first half of the year tends to be seasonally weaker amid slower activity levels as clients adjust budgets and spending capacity.

• As a comparison, 1HFY21 CNP of RM7.2mil represented only 27% of FY21 CNP of RM26.2mil. The group also declared a 1HFY22 interim dividend of 2 sen, 2x YoY.

• 2QFY22 revenue of RM126mil was moderately lower by 6% YoY mainly due to lower contribution from the power and machinery (P&M) segment which more than offset revenue growth from other operating segments. Despite a 25% YoY decrease in P&M pretax profit contribution, strong turnaround of oilfield services and integrated corrosion solution segments propelled 2QFY22 CNP, which surged 5x to RM8mil from RM1.3mil in 1QFY22.

• QoQ, Deleum’s 2QFY22 CNP doubled with a 23% increase in revenue and lower operating expenses coupled with a 10%- point decline in the effective tax rate.

• P&M’s share of 2QFY22 pretax profit slightly rose to 61% from 57% in 1QFY22 on higher sales as oilfield services slid to 29% from 33% while the integrated corrosion solutions’ segment remained at 10%.

• Deleum’s outstanding order book shrank by 13% QoQ to RM350mil as at end-2QFY22 from RM400mil in 1QFY22 due to better project execution in the current quarter. However, we expect a stronger 2HFY22 as the group is working on securing project extensions from existing clients. This is also supported by its tender book substantially rising by 20% to RM500mil from RM400mil previously as the group foresees elevated oil & gas activities in the near future.

• Deleum’s 2QFY22 net cash balance of RM188mil already represents 73% 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 FY23F PE of 7.5x, 38% below the sector average of 12x. Stripping the group’s net cash from the market cap, the stock trades at a bargain FY23F PE of only 2x while offering a decent dividend yield of 3.4%.

Source: AmInvest Research - 24 Aug 2022