Investment Highlights

• We maintain BUY on Deleum with a higher fair value of RM1.26/share (from RM1.15/share previously), pegged to a FY23F PE of 12x – line with Malaysian oil & gas (O&G) operators’ average. Our fair value also implies an unchanged 3-star ESG rating following the uplift of tender suspension by Petronas on its integrated corrosion solution (ICS) operations.

• Deleum’s FY22 core net profit (CNP) of RM39mil was above expectations, exceeding our forecast by 12% and street’s by 8%. The positive variance was mainly due to exceptionally higher revenue and earnings contributions from the power and machinery (P&M) segment.

• The group declared a second interim dividend of 3.25 sen per share, bringing FY22 dividend per share to 5.25 sen (+2.4x YoY). This also translates to a payout ratio of 50%, which is broadly in line with our expectations.

• Subsequently, we raise our FY23F/FY24F earnings by 9%/15% and introduce FY25F profits with a growth of 6%, banking on resilient offshore oil and gas activities amid still-elevated oil prices.

• YoY, FY22 revenue grew by 25% YoY to RM698mil on the back of stronger sales recorded across all operating segments, particularly the P&M segment. In addition to the higher revenue, FY22 CNP rose by a larger 59% YoY on better profit margins, which was partially offset by a 10%-point increase in effective tax rate to 26%.

• QoQ, Deleum’s 4QFY22 CNP skyrocketed 2.5x to RM20mil in tandem with a 2.2x surge in revenue to RM316mil, supported by a substantially higher earnings contribution from the P&M division. This partially mitigated declining profit from oilfield services (OS) and integrated corrosion solution (ICS) segments as well as a 6%-point increase in effective tax rate to 23%.

• P&M contributes to 73% of FY22 group pretax profit, followed by integrated corrosion solutions at 27% while oilfield services made rather insignificant earnings of less than RM1mil.

• On the other hand, we understand that the outstanding orderbook stood at RM400mil as at end-4QFY22, down by 11% QoQ from RM447mil in 3QFY22 amid slower job replenishments. Nevertheless, we anticipate a sequential pick up in orderbook over the coming quarters backed by a sturdy tender book of RM400mil.

• We also highlighted earlier that the outlook for domestic oil and gas sector is expected to remain strong as guided by Petronas Activity Outlook 2023-2025. Hence, demand for well services and maintenance, construction & modification sub-segments (both of which constitute Deleum’s key operations) are anticipated to see positive growth over the short term.

• Deleum’s 4QFY22 net cash balance of RM166mil already represents 43% 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 9x, 25% 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 6%.

Source: AmInvest Research - 1 Mar 2023