Investment Highlights

• We maintain BUY on Deleum with a lower fair value of RM1.22/share (from RM1.33/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 with the uplift of tender suspension by Petronas on its integrated corrosion solution (ICS) operations.

• The lower fair value stems from lower FY23F earnings Following a small group briefing by management yesterday. We cut FY23F earnings by 30% primarily due to delayed recovery for the group’s integrated corrosion solution (ICS) segment and higher associated costs related to oilfield services contract and business efficiency improvements.

• Salient highlights from the briefing are as follows:
  • Management continues to reiterate a bullish outlook for the sector despite ongoing emphasis on renewables as a preferred source of energy mainly due to low returns on investment (ROI), which we gather lags behind fossil fuels by double-digits. Moreover, the group believes uncertainties surrounding the sustainability of renewable solutions, particularly from an environmental standpoint, is expected to persist and will eventually come into play.
  • Management sees a strong tender environment for the ICS segment, as substantial works were delayed during the Covid-19 pandemic leading to an estimated maintenance backlog of 2-3 years. Management is guiding orderbook wins to improve significantly as early as 1QFY24, which could be accompanied by improved margins at low double-digits due to fully depreciated assets. However, due to the lack of awards in YTD2023, the group expects the ICS segment to pose a loss of RM5mil-6mil from diseconomies of scale before recovering strongly in FY24F.
  • Separately, management updates that Petronas is expected to begin tenders for its maintenance, construction and modification services (MCM) works amounting to a total of RM8bil, of which Deleum targets to secure 5%-10%. This is to be followed by new rounds of bidding for sponge jet projects in Indonesia at a later date.
  • The oilfield services segment is progressing well and has begun work on 6 contracts, which is expected to add RM10mil-RM15mil to its earnings annually. However, this also implies the group will have to incur startup and mobilisation costs of RM5mil-RM6mil, which will be expensed in FY23F.
  • The group is currently in the midst of acquiring an existing asset in Indonesia for the Power & Machinery (P&M) division. Although guidance on the matter is scarce, management does not intend to introduce new capacity through acquiree company and saturate the country’s market, which may negatively impact margins.
  • Lastly, the group is also in the midst of upgrading its enterprise resource planning (ERP) systems, which is expected to cost RM3mil-4mil, to be expensed in FY23.
• Deleum currently trades at an unjustified FY23F PE of 10x, 9.2% 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.

Source: AmInvest Research - 19 Oct 2023