Investment Highlights

• We maintain BUY on Deleum with an unchanged fair value of RM1.26/share, 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.

• Our forecasts are unchanged following an analyst briefing yesterday. These are the key takeaways:

• The stellar revenue growth of 29% YoY achieved by the power and machinery (P&M) segment in FY22 was mainly driven by an increase in after-sales support and services for gas turbines, particularly in 4QFY22.

• We note that its key clients (mainly from Petronas group of companies) have been deferring work orders in 1HCY22 amid delayed process of finalising a long-term service and maintenance contract. On a positive note, the clients eventually renewed the contract under a 2-year master service agreement in 3QFY22, which sequentially led to a notable rise in service and maintenance activity for gas turbines in 4QFY22. Management highlighted that the segment’s near-term outlook remains encouraging premised on gas turbines’ stable and recurring demand for regular service and maintenance.

• The group’s slickline operations, which contributed 16% of FY22 revenue, continue to chart resilient performance with close to full utilisation.

• Despite the commendable utilisation rate, oilfield services (OFS) segment barely broke even in FY22 on higher operating expenses, mainly from higher-than-usual upgrade and maintenance of slickline equipment. However, management guided that the segment’s profit margins will gradually improve over the upcoming quarters on the back of normalised operations.

• As at end-4QFY22, the outstanding order book was relatively stable QoQ at RM396mil and tenders at RM393mil. The group foresees robust oil and gas activities and higher capex from Petronas to support its job replenishment rate.

• In addition, the group also has a number of acquisitions in the pipeline to further spur earnings growth. Despite limited clarity, we gather that it is in the midst of finalising deals to acquire 3 oil and gas services companies over the next couple of months.

• Deleum’s 4QFY22 net cash balance of RM166mil already represents 42% 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 6x while offering a compelling dividend yield of 7%.

Source: AmInvest Research - 8 Mar 2023