• Deleum Berhad’s (Deleum) 2QFY17 reported earnings remain weak declining by -8.7%yoy to RM6.7m

• Decline in earnings is in tandem with decline in revenue of - 8.4%yoy to RM106.5m

• 2HFY17 expected to remain challenging

• Orderbook remains intact at approximately RM2b

• Maintain Neutral with revised TP of RM0.77 per share

Normalised earnings within expectations. Deleum's reported earnings declined by -8.7%yoy to RM6.7m, in-line with a -8.4% decline in revenue. Excluding forex losses (-RM5.8m), the company's 6MFY17 cumulative earnings of RM13.9m kept pace with ours and consensus expectations, making up 50.2% and 46.3% our full year earnings forecasts respectively.

Power & Machinery (P&M). Segment revenue and profit declined by - 32.6%yoy and -39.3%yoy as lower work order for exchange engines of RM42.4m, lower contribution from parts, repairs and maintenance, valve and flow regulators of RM19.2m.

Oilfield services (OS). Segment results also did not fare well as revenue and profit declined by -16.7%yoy and -8.0%yoy respectively. The lacklustre performances were a result of lower revenue contribution from slickline activities by RM7.6m and well intervention and enhancement services by RM3.4m.

Integrated Corrosion Solution (ICS). Despite marginally lower revenue by -6.2%yoy, segment profit rose by +58.4%yoy to RM0.97m premised on improved margins on work orders as a result of operational efficiencies and lower costs.

Prospects buoyed by strong orderbook. Deleum’s orderbook remains buoyant at approximately RM2b representing a burn-rate of around four years. Earnings visibility continues to remain intact.

Impact on earnings. We are fine tuning our FY18 forward earnings to RM34.4m to reflect lower than expected job order recognition and tightening operating margin.

Maintain Neutral. We are maintaining Neutral with a revised target price of RM0.77 per share. Due to the delayed Maintenance, Construction and Modification (MCM) works coupled with lower than expected work orders from the P&M segment, we believe that the company’s share price could experience further downside weakness. Out valuation is based on EPS18 of 8.6sen pegged to PER18 of 9x. Our target PER18 is premised 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 - 23 Aug 2017