INVESTMENT HIGHLIGHTS

• Deleum Bhd’s 1QFY19 earnings grew >100% to RM2.8m

• Both P&M and OS segments profitable

• Integrated Corrosion Solutions segment recorded before tax loss of -RM7.4m

• FY19-20F earnings estimates lowered by -24.8% and - 9.7% respectively due to margin compression

• Maintain BUY with a revised TP of RM1.17 per share

Earnings growth driven by stronger work orders. Deleum’s 1QFY19 earnings grew by >100%yoy to RM2.8m driven by stronger work orders from across its segment. Despite recording earnings below our and consensus’ full-year earnings estimate, we remain optimistic that earnings for Deleum in the coming quarters will continue to be buoyed by high activity levels mainly from the company’s MCM contract as we are expecting bulk of the activities to happen in FY19 which will offset the compressed margins.

Power & Machinery. Segment revenue grew by +7.5%yoy due to higher demand for valves and flow regulator services, turbine parts and repair and; increase contribution from retrofit projects. However, this was offset by the weaker work orders for exchange engines and other ancillary services. Meanwhile, profit contracted by -4.0%yoy due to unfavourable change in sales mix and downward pressure on margins.

Oilfield Services. Segment revenue increased by +16.3%yoy due to stronger work orders from well intervention and enhancement services. That said, segment profit was reduced by -19.5%yoy due to downward pressure on margins earned from slickline activities.

Integrated Corrosion Solutions. Segment revenue surged by +60.2%yoy due to the additional revenue generated from the MCM services despite reduced contribution from Pan Malaysia Blasting Contract which expired in November 2017. However despite the surge in revenue, segment profit declined by >100% due to pressure on margins and higher operating costs to support the MCM contract.

Impact on earnings. We are lowering our FY19-20F earnings estimates by -24.8% and -9.7% to RM34.9m and RM39.0m respectively as we opine that margin compression will continue to drag earnings.

Maintain BUY. We are maintaining our BUY recommendation on Deleum with a revised target price of RM1.17 per share (from RM1.39 previously). Our TP is premised on PER20 of 12x pegged to EPS20 of 9.8sen. At peak valuation, the stock traded at PERs in excess of 18x.

Source: MIDF Research - 28 May 2019