INVESTMENT HIGHLIGHTS

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

• MCM callouts to escalate in 2QFY18

• Tenders and market surveys in high gear

• Current orderbook at RM1.21b

• Maintain Neutral (positive bias) with revised TP of RM1.20 per share

Profit highest since 2QFY15. To recall, 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%.

Update on MCM contract. Deleum’s MCM activity levels are expected to pick up from 2QFY18 onwards. In 4QFY17, the Integrated Corrosion Services division (the division where the MCM contract is recognised under) experienced margin compression due to the mobilisation and upscaling capacity to support the MCM works.

Earnings up cycle likely in 2HFY18. Based on the MCM timeline, 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. The bulk of the activity and recognition of earnings will most likely take place in FY19.

Tender activities. The management guided that tendering activities and market surveys have increased exponentially this year. They are expecting the high rate of tender activities to continue to at least in the middle of FY18 – intensity is approximately 2-3x that of FY16. The two possible reasons why tender activities and market surveys have picked up are: (i) long term contracts expiring and fresh bids required and; (ii) new contracts being called for new projects.

Neutral with Positive Bias. Based on the anticipated earnings up-cycle in 2HFY18 from the MCM contracts, we are revising our target price upwards to RM1.20 (previously RM1.03). Our target price is premised on PER18 of 14x (previously 12x) pegged to EPS18 of 8.6sen. Our target PER18 is based on the company’s five-year historical average PER. 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 - 9 Mar 2018