INVESTMENT HIGHLIGHTS

• Newswires have been rife with news on RM6b MCM jobs

• Deleum is poised to be frontrunner for jobs in Penisula Malaysian waters

• Award of contract soon but works likely to start in 2QFY18

• Orderbook remains intact at approximately RM1.69b

• Stock fundamentals intact but share prices rallied in anticipation of MCM award

• Downgrade to Trading Sell to capitalise on upbeat news flow with unchanged TP of RM0.77 per share

Newswires rife with news on MCM jobs. Newswires have been reporting on the impending award of the 5-year maintenance, construction and modification (MCM) jobs worth RM6b. The scope encompasses PMO gas and PMO oil, SKO gas and SKO oil and SBO oil and gas. Deleum Berhad, along with a few other notable oil and gas service providers has been named as shortlisted candidates.

In partnership with Icon Offshore. Deleum Berhad will be partnering

Icon Offshore Bhd (not rated) to provide offshore support vessels (OSV) for the works to be undertaken under the MCM contract. Icon Offshore will work under the capacity of a sub-contractor to Deleum.

Award of contracts. No official announcements have been made on the award of the contracts but we believe that it could likely be towards 4QFY17. Therefore, detailed planning and mobilisation of assets could only happen in 1HFY18 and construction works done in 2HFY18. Earnings could be backend-loaded in FY18.

Impact on earnings. No changes to earnings estimate as impending contract wins within expectations.

Sell on strength. Deleum’s share price has appreciated by more than +26% in the past two weeks due to strong news flow on the potential award of the MCM contracts. While we are cognisant on the strong fundamentals of the company and are still sanguine that Deleum is a frontrunner, we are recommending investors to sell on strength. This is largely due to the fact that earnings accretion from the MCM jobs will most likely be recognised towards the latter part of FY18 only. The bulk of the activity and earnings will most likely take place in FY19.

Unchanged TP. Although we are recommending an opportunistic Trading Sell at this juncture, we reiterate that Deleum’s company fundamentals and prospects remain intact. We are maintaining our TP of RM0.77 per share. Investors may consider accumulation the stock on share price retracements to benefit from earnings upcycle in 2HFY18 onwards. Our 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 - 27 Sept 2017