Investment Highlights

• We reiterate BUY call on Deleum with a higher fair value (FV) of RM1.80/share (from RM1.70/share previously), pegged to FY24F PE of 11x – at parity to the Malaysian oil and gas operators’ average. Our FV incorporates an unchanged neutral 3-star ESG rating .

• We raised FY24-FY26F earnings by 18%-20% to account for stronger operating margins from the Oilfield Integrated Services (OIS) segment by +4%-pts to 11.2%, which turned positive after 3 consecutive quarters of loss-making operations.

• On an annualised basis, Deleum’s 1HFY24 core net profit (CNP) of RM35.4mil (excluding unrealised forex gains and losses on liquidation of a subsidiary) was above our expectations at +7% against our full-year estimate and +2% of consensus’.

• Additionally, the group reported a first interim dividend per share (DPS) of 4 sen, which translates to a payout of 51%, well within our expectations of 7 sen for the full year.

• YoY, the group’s 1HFY24 revenue increased by 24%, driven by stronger contributions from the Power & Machineries (P&M) and OIS segments. Together with a higher operating profit margin owing to the recovery of the OIS segment, lower effective tax rate and higher net interest income, 1HFY24 CNP rose by 68%.

• QoQ, Deleum’s 2QFY24 revenue saw a strong 40% rise driven by broad-based improvement, particularly the OIS segment which rose by 55%. Management notes that the group has secured long term sludge treatment after the completion of its pilot project and expects to see contribution from solid control operations and expanding business in Indonesia. 2QFY24 CNP rose sharply by 71% QoQ, driven by the rebound on operating margins from the OIS segment which rose by 25%-pts.

• We continue to like Deleum as one of our top conviction calls within the small to mid-cap space, given its niche and asset-light business model. We gather that the group is well positioned within the industry as one of the most preferred contractors within the P&M scene and is the leading provider of slickline services.

• Stripping out the group’s net cash of RM214mil (44% of current market cap), Deleum currently trades at a highly compelling FY24F P/E of only 4x, less than half of the local contractor’s average, while offering attractive dividend yields of 5%-6%.

Source: AmInvest Research - 22 Aug 2024