• Deleum Berhad (Deleum) expected to remain profitable in 2017 due to asset light business model

• Increase in market surveys for oilfield services – new scope projects

• Orderbook remains strong at approximately RM2.2b with burn-rate of four years

• 2HFY17 expected to perform better

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

4QFY16 earnings recap. To recap, although Deleum’s 4QFY16 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.

Power & Machinery (P&M). Company guided that activity levels for the P&M segment was more vibrant in 4QFY16 compared with the first two months of 2017 as clients were managing their respective allocations for operating expenditure before the end of the year.

Oilfield Services (OS). Management guided that there were a sizable number of market surveys for oilfield services for the first two months of 2017. These surveys involved new work scopes and Deleum has so far, participated in around RM90m worth of bids in the OS segment.

Prospects buoyed by strong orderbook. Deleum’s orderbook remains buoyant at approximately RM2.21b representing a burn-rate of around four years. Earnings visibility continues to remain intact.

Impact on earnings. No changes to earnings estimates. 2HFY17 expected to be stronger than 1HFY17.

MCM update. Management guided that they have received notifications from Petronas to extend the bid validity period for the maintenance, construction and modification (MCM) works for the Malaysian production sharing contractors. We remain optimistic that the contract will be announced and that Deleum’s portion to be approximately RM500m and this will be booked under its Integrated Corrosion Solutions division.

Maintain BUY. Given the company’s solid orderbook with a burn-rate in excess of four years, we are maintaining our BUY recommendation on an unchanged 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 premised on the company’s long term historical average rolling PER. At peak valuation, the stock traded at PERs in excess of 18x. Additionally, there are five new projects which were sanctioned by Petronas for 2017. These projects are new and would likely involve offshore platforms. These new projects provide opportunities for Deleum as it will require power turbines to operate.

Share price undetered by volatile crude oil prices. For the past week, global Brent crude oil price has declined by approximately -11%, from USD56pb to USD50pb (2017 low). However, Deleum’s share price has managed to maintain between the stable range of RM1.00-1.03 per share. We believe that this is attributable to its solid orderbook and niche positioning in the oil and gas services value chain.

Source: MIDF Research - 16 Mar 2017