Investment Highlights

• We maintain BUY on Deleum with a higher fair value of RM1.02/share (from RM0.90/share previously), pegged to a rolled-forward FY23F PE of 11x. We also attach a 3% discount to our ESG rating of 2 stars given that one of its core operations remains blacklisted from Petronas’ tenders. Our valuation multiple is based on the average Malaysian oil & gas operators’ CY23F PE.

• We raise FY22–24F forecasts by 10–17% on higher profit margin assumptions following an analyst briefing yesterday. Here are the key takeaways:
  • In the power and machinery (P&M) segment, while Deleum recorded a 1HFY22 decline of 15% YoY in sales of gas turbine packages and after-sales support and services (which accounted for 48% of group revenue) to RM110mil, management remains optimistic on the long-term outlook given the necessity for periodic maintenance to ensure efficient performance of gas turbines.
  • Management further highlighted that despite the considerable potential orders for maintenance services from clients, it could not book in job awards due to delays in finalising contractual terms. The number of gas turbines operating in Malaysia is estimated to be 250–300 units, which implies robust demand for recurring maintenance services for these turbines.
  • The group’s slickline operations, accounting for 26% of 1HFY22 group revenue, remained busy with a commendable utilisation rate of above 80%, underpinning the strong revenue growth as well as the turnaround of the oilfield services division in 2QFY22. Also, recall that the group owns more than 50 units of slickline equipment and is well-known as the largest service provider in Malaysia’s slickline subsector with more than 50% market share.
  • Given the elevated activity level on the back of higher oil prices, Deleum is cautiously exploring opportunities to further strengthen its market leadership in the slickline subsector. To facilitate the expansion plan, we gather that the group is planning to spend a significant amount of capex on purchasing new equipment as well as upgrading obsolete assets.
  • As at end-2QFY22, the outstanding order book was relatively stable at RM355mil and tenders at RM507mil. Over the short-to-medium term, the group foresees elevated oil & gas activities alongside higher investment expenditure from Petronas to further spur its job replenishment rate.
  • While the P&M segment’s current order and tender books mostly comprise short-term maintenance jobs, the group is in talks with clients to secure long-term services agreement with contract period of at least 2 years which would substantially boost earnings visibility.
  • As for the integrated corrosion solutions division, which was impacted by Petronas’ suspension of licence to participate in tenders since March 2021, the group reaffirms that all necessary initiatives have been put in place and is confident of receiving positive responses from Petronas over the coming quarters.
• Deleum’s 2QFY22 net cash balance of RM188mil already represents 58% 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 FY23F PE of 8.4x, 24% below the sector average of 11x. Stripping out the group’s net cash from the market cap, the stock trades at a bargain FY23F PE of only 4x while offering a compelling dividend yield of 5.4%.

Source: AmInvest Research - 7 Sept 2022