Investment Highlights

• We reiterate our BUY call on Deleum with a higher fair value (FV) of RM1.66/share (from RM1.27/share previously), pegged to a higher FY24F PE of 12x – at parity to the Malaysian oil and gas operators’ average of 12x. YTD, the group’s share price has risen by 36.5%. Our FV implies an unchanged neutral 3-star ESG rating .

• Deleum FY23 core net profit (CNP) of RM43.9mil was above expectations, exceeding our forecast by 7.6% and consensus 12.7%. Nevertheless, we maintain our FY24- FY26F earnings premised on a gradual pace of recovery for the integrated corrosion solutions (ICS) subsegment.

• The group announced an interim dividend per share (DPS) of 3.7 sen, which brings FY23 DPS to 5.7 sen. This translates to a payout of 50%, broadly in line with its 2-year historical average.

• YoY, the group’s FY23 revenue growth of 13.5% was driven primarily by the power & machinery (P&M) segment, which continues to remain resilient. This was partially offset by the significant decline of 93% for the ICS segment, which saw lesser activities from alternative blasting and painting jobs in Indonesia as well as maintenance, construction, and modification (MCM) works with Petronas. With the higher revenue, FY23 CNP rose by 18.4% as P&M EBIT doubled.

• QoQ, Deleum’s 4QFY23 revenue declined marginally by 1.3% as support from sales activities for oilfield services was able to offset weaker performance by the P&M segment, which saw lower quantity of exchange engines delivered, sales of turbine parts, repairs and freight income. 4QFY23 CNP grew by 19.4% to RM13.4mil due to stronger EBIT margin registered by the P&M segment.

• The group’s orderbook grew sequentially by 23% QoQ to RM552.6mil, to be delivered within the next 24 months.

• We continue to like Deleum, premised on its reputation as a reliable contractor for the P&M industry and the recovery of its loss-making ICS operations. Hence, we believe the re- rating process is sustainable when the group begins to announce successive contract wins for the ICS segment.

• Nevertheless, stripping out the group’s net cash of RM214mil (43% of current market cap) presents Deleum at a highly compelling bargain FY24F P/E of only 5.6x while offering attractive dividend yields of 5%.

Source: AmInvest Research - 26 Feb 2024