Investment Highlights

• We maintain BUY on Deleum with a higher fair value of RM1.15/share (from RM1.02/share), pegged to a higher FY23F PE of 12x (vs. 11x previously), which is in line with Malaysian oil & gas (O&G) operators’ average. Our higher fair value is also arrived after removing the 3% valuation discount from an upgrade to our ESG rating to 3 stars from 2 stars previously following the uplift of tender suspension by Petronas on its integrated corrosion solution (ICS) operations.

• Our forecasts are unchanged as we remain upbeat on the group’s near-term earnings prospects underpinned by resilient offshore oil and gas activity levels amid elevated oil prices.

• Recall that the group’s 86.7%-owned Deleum Technology Solutions (DTS), which provides ICS services, is no longer blacklisted from bidding for Petronas’ projects upon the uplift of suspension back in December 2022. We understand that DTS has submitted the application for a 1-year renewal of its license from Petronas with anticipation of a positive outcome in the coming months.

• We positively view the timely suspension uplift, which allows DTS to take advantage of rising job flows in the domestic oil and gas sector. Note that the ICS segment’s orderbook of RM8.9mil as at end-3QFY22 mainly consists of an Indonesian project with outstanding works worth RM2mil as well as other maintenance projects amounting to RM6.9mil.

• As most ICS projects are expiring soon in the upcoming quarters, the group is actively bidding for new projects worth RM23mil in Indonesia.

• Furthermore, we expect the group’s oilfield services segment to benefit from a better outlook in well services as well as maintenance, construction & modification (MCM) subsegments, both of which are highlighted by Petronas Activity Outlook 2023-2025 (PAO 2023-2025) as having a steady and positive outlook.

• According to PAO 2023-2025, the well services segment (which includes slickline services) is projected to see a positive outlook over the next 3 years, driven by higher oilfield development and abandonment activities. This is further anchored by a number of well activities lined up in 2023, including (i) 96 wells to be drilled under development, appraisal, and exploration programme, (ii) 21 producing wells planned for workover activities, and (iii) 28 wells planned for plug-and-abandonment activities.

• Hence, Deleum, being the largest slickline operator in Malaysia accounting for 50% of domestic market share over the past 5 years, stands to benefit from the higher demand for well services.

• Furthermore, the MCM segment is also expected to record a steady growth on the back of a 37% increase in man-hour units from 8.7mil manhours in 2022 to 11.9mil manhours as projected in PAO 2023-2025. There are also substantively further upsides for MCM services from potentially higher activities of new producing oilfields.

• Deleum’s strong prospects are underpinned by a robust outstanding orderbook of RM447mil as at end-3QFY22, up 26% from RM355mil in 2QFY22 amid higher opex and capex spending by oil majors. The tender book also remains sturdy at RM404mil, providing further potential boost to its order book and near-term earnings growth.

• Deleum’s 3QFY22 net cash balance of RM184mil already represents 49% 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 endFY25F.

• Deleum is currently trading at an unjustified FY23F PE of 9.8x, 19% 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 5.5%.

Source: AmInvest Research - 26 Jan 2023