Investment Highlights

• Deleum Bhd’s 3QFY17 reported earnings tripled to RM10.8m

• All three business segments reported yoy revenue growth and profitability

• Significant pick-up in P&M segment with increased work orders

• Maintain Neutral with revised TP of RM1.03 per share

• Earnings up-cycle likely to happen in 2HFY18 with MCM win

Profit highest in seven quarters. Deleum’s 3QFY17 earnings tripled to RM10.8m from a year earlier – this is the highest earnings achieved in seven months since 4QFY15. Excluding realised forex losses of – RM1.785m (unrealised portion –RM3.807m), Deleum’s cumulative 9MFY17 earnings of RM20.6m kept pace with expectations, accounting for 75.5% of our full year FY17 earnings estimates.

Power & Machinery. Both segment revenue and profit expanded by +29.2%yoy and +104.5%yoy respectively. The commendable figures are attributable to higher revenue from parts, repairs and maintenance, valve and flow regulators. Work orders also increased particularly for the exchange engine and ancillary services.

Oilfield Services. Segment revenue and profit staged marginal growth of +1.4% and +1.2% respectively driven by higher oilfield chemicals and wellhead maintenance contributions. Slickline activities however remain lacklustre.

Integrated Corrosion Solution. Although segment revenue grew by +2.7%yoy, segment profit surged to RM1.8m for the quarter largely attributable to higher work orders completion on corrosion protection and maintenance services and lower costs.

Earnings upcycle likely in 2HFY18. Based on its recent MCM win, we believe that the earnings upcycle is likely to happen in 2HFY18. Our view 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.

Change in earnings. No change to earnings estimates at this juncture.

Revised TP. Based on the anticipated earnings up-cycle in 2HFY18, we are revising our target price upwards to RM1.03 (previously RM0.77). We are revising our target PER18 to its 5-year historical average of 12x pegged to EPS18 of 8.6sen. We are maintaining our NEUTRAL recommendation but reiterate that Deleum’s company fundamentals and prospects remain intact. At peak valuation, the stock traded at PERs in excess of 18x.

Source: MIDF Research - 22 Nov 2017