INVESTMENT HIGHLIGHTS

• Deleum Berhad’s (Deleum) 3QFY16 reported earnings declined to RM3.3m

• Margin compression in P&M and OS expected, due to heavy competition and costs reductions from clients

• Orderbook remains strong at approximately RM2.9b with burn-rate of four years

• Current share price valuation of 6.6x PER undemanding offering attractive potential capital gains and dividend yield

• Maintain BUY with unchanged TP of RM1.25 per share

Expecting tail-heavy earnings. As detailed in our results preview report dated 26 October 2016, Deleum’s 2H16 earnings is expected to be tail-heavy due to deferred orders. The company’s 3QFY16 earnings declined by -73.4%yoy to RM3.3m. Although its cumulative 9MFY16 earnings of RM16.6m fell short of ours and consensus full year earnings expectations by a variance of more than >10%, we believe that the earnings will be back-end loaded in 4QFY16 and into FY17.

Prospects buoyed by strong orderbook. Deleum’s orderbook remains buoyant at approximately RM2.9b representing a burn-rate of around four years. As such, earnings visibility remains intact.

Power & Machinery (P&M). Quarterly segment revenue rose by +8.6%yoy to RM95m due to higher revenue from the exchange engines. However, there was a decline in operating profit due to downward pressure on margins and unfavourable forex movements.

Oilfield Services (OS). Quarterly segment revenue also expanded by +32.3%yoy to RM32.4m mainly attributable to higher revenue contribution from slickline activities in East and West Malaysia due to higher utilisation of slickline asset.

Integrated Corrosion Solution. Both segment revenue and operating profit were under strain due to delays in securing work orders for corrosion protection and maintenance stemming from the Pan Malaysia Blasting Contract.

Impact on earnings. Maintaining our earnings estimates at this juncture.

Silver lining. We are anticipating lumpy orders to be placed by year end and flow into FY17. In addition, the announcement for the maintenance, construction and modification (MCM) works for the Malaysian production sharing contractors involving topside maintenance, hook-up and commissioning and facilities improvement works could be announced by year end. We are estimating Deleum’s portion to be approximately RM500m and this will be booked under its Integrated Corrosion Solutions division.

Maintain BUY. Given the company’s strong orderbook with a burn-rate in excess of four years, we are maintaining our BUY recommendation on a target price of RM1.25 per share. Our target price is based on EPS17 of 12.5sen pegged to PER17 of 10x. Our target PER17 is based on its five year historical average rolling PER. At peak valuation, the stock traded at PERs in excess of 18x.

Source: MIDF Research - 23 Nov 2016