• We maintain BUY on Deleum with an unchanged fair value of RM1.33/share, pegged to a FY23F PE of 12x – in line with Malaysian oil & gas (O&G) operators’ average. Our fair value also implies an unchanged 3-star ESG rating.

• We maintain our forecasts as Deleum’s 1HFY23 core net profit (CNP) of RM20.5mil was within expectations, making up 46% of our FY23F earnings and 47% of street’s. As a comparison, 1H accounted for 42% of 1HFY22 core earnings.

• QoQ, Deleum’s 2QFY23 CNP rose 11% to RM10mil on the back of a 52% revenue growth, driven by demand for control/safety valves, flow regulators, turbine parts/repairs and field activities for the power & machinery division (P&M) (+59%) and slickline, specialty chemicals, well stimulation and gas lift valve operations for oilfield services (+38%). This was partly offset by EBITDA margin declining by 4%-point to 13% due to RM1mil realised foreign exchange loss and fair value loss of forward contracts in the P&M segment.

• We note that the integrated corrosion solutions segment posted minimal sales and earnings in 1HFY23 due to depleted outstanding works while awaiting further job awards following the uplift of suspension by Petronas.

• Deleum’s outstanding order book slid 3% to RM538mil as at the end-2QFY23 from RM552mil in end-1QFY23 due to slower contract replenishment vs. revenue recognition. However, its tender book surged by 2.1x QoQ to RM675mil, signalling rising potential job wins amid elevated domestic oil and gas activities.

• Deleum is currently trading at an unjustified FY23F PE of 8x, 33% 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 3x while offering a compelling dividend yield of 7%.

Source: AmInvest Research - 30 Aug 2023