INVESTMENT HIGHLIGHTS

• Deleum Bhd’s 1QFY18 reported earnings grew +6.5%yoy to RM1.4m

• Power & Machinery and Oilfield Services divisions profitable

• 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

• Maintain Neutral with revised TP of RM1.39 per share

Decent start to the year. Deleum’s 1QFY18 reported earnings grew by +6.5%yoy to RM1.4m. Excluding one-off items ie. Tax penalty, fair value losses and forex losses, Deleum’s 1QFY18 normalised profit stood at RM2.6m. Although the earnings seem far from our full year FY18 earnings estimates, we maintain our earlier notion that activity levels and earnings could pick up from 2QFY18 onwards. This will be largely owing to the company’s MCM contract.

Power & Machinery. Both segment revenue and profit grew by +11.7% and +21.1% respectively mainly attributable to increase in work orders for exchange engines, third-party and other ancillary services. Profit margin expanded by +0.6ppts for the quarter.

Oilfield Services. Similar with P&M segment, segment revenue and profit staged positive growth due to higher slickline utilisation, but offset by lower work orders for well intervention and enhancement services. Segment margin was healthy at +15.6% for the quarter.

Integrated Corrosion Solution. Although segment revenue more than doubled from a year earlier, the segment recorded a loss of -RM3.6m mainly due to higher costs incurred for the Pan Malaysia Painting and Blasting contracts and later than anticipated start of the MCM.

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. No change to earnings at this juncture as 1Q is typically a weaker quarter and 4Q is a stronger quarter.

Maintain NEUTRAL with upside bias. Based on the anticipated earnings up-cycle in 2HFY18 from the MCM contracts and the challenging P&M division, we are maintaining our NEUTRAL stance with upside bias on Deleum. We roll forward our valuation base year, deriving a new target price at RM1.39. Our target price is premised on PER19 of 12x pegged to EPS19 of 11.6sen. 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 May 2018