INVESTMENT HIGHLIGHTS

• Deleum Bhd’s 4QFY17 reported earnings grew +36.2%yoy to RM13.5m

• All three business segments sustained profitability

• Margin expansion recorded for P&M and OS divisions

• Earnings up cycle to start in 2HFY18 but revenue pressure seen in P&M and OS divisions

• Total dividend declared for FY17 total 4.25sen per share

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

Profit highest since 2QFY15. Deleum’s 4QFY17 earnings grew by +36.2%yoy to RM13.5m – highest since 2QFY15. Cumulative FY17 earnings of RM32.3m (+21.7%yoy) outpaced our expectations by a variance of more than >10%.

Power & Machinery. Although segmental revenue contracted by - 15.1%yoy, segment profit managed to stage a growth of +9.0%yoy to RM39.1m. The contraction in revenue is largely due to lower work orders for exchange engines and retrofit projects. The higher profit on the other hand was due to a one-off restructuring charge in 4QFY16 of RM4.4m. Excluding this one-off charge, the segment normalised profit would have contracted by approximately -3.0%yoy.

Oilfield Services. Segment revenue also contracted by -11.9%yoy largely due to lower utilisation of slickline assets. Despite this, profit grew by +16.0%yoy to RM14.5m attributable to higher margin from oilfield chemicals, lower write-offs and lower financing costs.

Integrated Corrosion Solution. Although segment revenue grew by +14.0%yoy, segment profit remained flat year-over-year for the quarter largely attributable to lower margin works and mobilisation costs related to the MCM win.

Earnings up cycle 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.

Impact on earnings. Although FY17 earnings posted better-thanexpected earnings, we are maintaining our earnings forecasts at this juncture as the P&M segment is still expected to remain challenging while a large portion of the OS projects are due to expire in 2018 and 2019.

Unchanged TP. Based on the anticipated earnings up-cycle in 2HFY18 from the MCM contracts and the challenging P&M division, we are maintaining our target price at RM1.03. Our target price is premised on PER18 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 - 27 Feb 2018