Investment Highlights

• 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 following a small group briefing by management yesterday. These are the salient highlights:

• Management reaffirmed on the bright prospects for the sector against the background of Brent oil prices trending above US$90/barrel while the global industry remains underinvested since the past downcycle in 2015, which means that new capacity will not be emerging soon.

• Given the past Covid-19 movement restrictions, the sector’s maintenance ecosystem currently could be behind schedule by 2-3 years. Hence, there is an urgent need to ramp up maintenance CAPEX to ensure the domestic industry’s asset integrity and business sustainability.

• We note that the integrated corrosion solutions segment posted minimal sales and earnings in 1HFY23 while awaiting further job awards following the uplift of suspension by Petronas early this year.

• Deleum is confident of adding up to RM500mil of the new anticorrosion contracts under Petronas Carigali’s maintenance, construction and modification (MCM) services for offshore Peninsular Malaysia. Recall back in 2017, the group’s 60%- owned Deleum Primera secured the Package C of the MCM for a primary contract of 5 years with a 1-year extension option. Following acquisitions from other stakeholders, the group’s stake in Deleum Primera (now renamed to Deleum Technology Solutions) has risen to 86.7% currently.

• Management expects to ramp up oilfield and integrated corrosion solution (ICS) services to reduce reliance on the power & machinery (P&M) segment, which accounted for 81% of 1HFY23 group turnover. Hence, Deleum expects P&M, still on track for sustainable growth, to contribute below 50% of group revenue by 2026.

• By 2026, Deleum expects its net profit to increase by 50%-60% vs. FY22 levels, which implies a steady 4-year CAGR of 10.7%- 12.5% via organic growth and excluding any potential acquisitions. Currently, the group is looking into investing into energy-saving investments which can generate a ROI of 12% with a payback of 5-6 years and elevate its ESG profile.

• Deleum’s outstanding orderbook of RM538mil as at the end- 2QFY23 is poised to rise as its tender book surged by 2.1x QoQ to RM675mil, signalling rising potential job wins amid elevated domestic oil and gas activities.

• Stripping out the group’s net cash of RM220mil (60% of current market cap, Deleum currently trades at a highly compelling bargain FY24F P/E of only 3x while offering attractive dividend yields of 6%-7%.

Source: AmInvest Research - 12 Sept 2023