INVESTMENT HIGHLIGHTS

• Deleum Bhd’s 2QFY18 reported earnings staged a leap of +36.9%yoy to RM9.2m

• Power & Machinery and Oilfield Services divisions profitable

• Margin expansion recorded for P&M and OS divisions

• Earnings upcycle started in 2QFY18 as guided in our previous report

• Upgrade to BUY with unchanged TP of RM1.39 per share

Earnings turnaround as anticipated. Deleum’s 2QFY18 reported earnings grew by +36.9%yoy to RM9.2m. Despite 6MFY18 earnings still failing to hit the halfway point of our FY18 earnings forecasts, we remain optimistic that earnings will continue to be buoyed by high activity levels in 2HFY18. The company’s earnings support will still largely be contributed by the P&M segment.

Power & Machinery. Both segment revenue and profit grew by +23.0% and +73.0% respectively mainly attributable to increase in work orders for exchange engines, retrofit projects, parts, repair and maintenance, valve and flows regulators and higher commission income earned.

Oilfield Services. Despite segment revenue contracting by -1.6%yoy, segment profit managed to grow by +4.5%yoy to RM43.7m. This is largely attributable to better sales mix with higher margin works executed and supported by lower financing costs.

Integrated Corrosion Solution. Although segment revenue more than doubled from a year earlier, the segment recorded a loss of –RM18.2m mainly due to higher costs incurred for the Pan Malaysia Painting and Blasting contracts and higher mobilisation costs for the MCM contract.

Impact on earnings. As previously guided, we have anticipated Deleum’s earnings upcycle to start in 2QFY18. Moving forward, we are optimistic that earnings will sustain into 2HFY18 as crude oil prices remain relatively stable, activity levels remain at a comfortable level and mobilisation cost for the Pan Malaysia MCM to stabilise. 3QFY18 and 4QFY18 are generally strong quarters for the company.

Upgrade to BUY with upside bias. Given the upbeat earnings, optimistic outlook and current jobs at hand, we believe that the company will end the year well. Therefore, we are upgrading Deleum to BUY with an unchanged TP of RM1.39 per share. Our target price is premised on PER19 of 12x pegged to EPS19 of 11.6sen. At peak valuation, the stock traded at PERs in excess of 18x.

Source: MIDF Research - 23 Aug 2018