• Deleum Berhad’s (Deleum) 4QFY16 reported earnings rose two folds quarter-over-quarter to RM9.9m

• Margin expansion for both Oilfield Services and Integrated Corrosion Solution divisions

• Orderbook remains strong at approximately RM2.5b with burn-rate of four years

• 3.5sen dividend declared for FY16

• Maintain BUY with revised TP of RM1.18 per share

Improving earnings quarter-over-quarter. Although Deleum’s reported earnings declined by -25.9%yoy to RM9.9m, it grew by two folds on a quarterly sequential basis to RM9.9m corroborating our view that earnings will continue to improve in 4QFY16 into FY17. Excluding exceptional items such as impairments and write-offs on PPE and inventories and forex losses, the company’s full year FY16 normalised earnings would have been RM36.6m.

Prospects buoyed by strong orderbook. Deleum’s orderbook remains buoyant at approximately RM2.5b representing a burn-rate of around four years. Earnings visibility continues to remain intact.

Power & Machinery (P&M). On a quarterly sequential basis, segment revenue and profitability increased by +59.8% and 139.9% respectively as a results of secured higher work orders for exchange engines, retrofit projects and valves and flow regulators coinciding with customers' maintenance cycles.

Oilfield Services (OS). Quarterly segment revenue also expanded by +11.9%yoy to RM36.3m mainly attributable to higher slickline utilisation. However, profitability declined due to change in sales mix and a higher costs to serve mainly equipment rental and consumables

Integrated Corrosion Solution. The ICS segment is also performing well with both revenue and profitability increasing by +11.5%qoq and +1248%qoq. Segment profit margin expanded by +7.2ppts to 9.3%.

Impact on earnings. We take this opportunity to fine tune our FY17 by -3.6% to better reflect current profit margins in challenging environments

Silver lining. We are anticipating lumpy orders to be placed in 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 soon. 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 revised target price of RM1.18 per share. Our target price is based on EPS17 of 13.1sen pegged to PER17 of 9x. Our target PER17 is based on the company’s long term historical average rolling PER. At peak valuation, the stock traded at PERs in excess of 18x.

Source: MIDF Research - 28 Feb 2017