KEY INVESTMENT HIGHLIGHTS

• Deleum Berhad’s 3QFY19 earnings came in above expectations at RM13.1m

• Improved performance from across its business segment boosted earning

• Power & Machinery remains the major contributor

• Oilfield Solutions returned to black with a profit of RM0.6m in 3QFY19

• FY19-20F earnings revised upwards by +28.4% and +9.7%

• Maintain NEUTRAL with a revised TP of RM1.11 per share

3QFY19 earnings above expectation. Deleum Berhad’s (Deleum) 3QFY19 net profit came in at RM13.1m. This brings its 9MFY19 cumulative earnings to RM24.7m which is above our but below consensus’ full-year earnings estimates at 81.2% and 61.5% respectively. Comparing against 3QFY18, its revenue and earnings jumped by +69.0%yoy and +43.4%yoy respectively. Meanwhile, on a quarterly sequential basis revenue grew by +39.8% whilst earnings surged by +51.2%qoq respectively. This was driven by improved performance from across its business segment coupled with the turnaround of its Oilfield Solutions (OS) which has turned to black again in 3QFY19.

Power & Machinery. Segment revenue and profit surged by +98.8%yoy and +89.3%yoy respectively. The strong revenue and earnings growth during the quarter was primarily driven by: (i) strong orders from exchange engines, turbine parts and repair, valve and flow regulators services, increase in income from third party sales and other ancillary services as well as; (ii) higher supply of local field service representative. However, this was offset by lower commission income earned on oil and gas projects and decreased contribution from retrofit projects.

Oilfield Services. Segment revenue grew marginally by +4.9%yoy due to stronger contribution from GLV services and better operating profits from both SCWS and well intervention and enhancement services. Furthermore, the segment profit has returned to black during the quarter recording a RM0.6m in profits. This was however offset by margin compressions and slowdown in activities from its slickline operations.

Integrated Corrosion Solutions. Meanwhile, revenue for ICS also grew by +60.6%yoy whilst its profits grew by >100%yoy. This was mainly attributable to the high activity levels and work order deliveries from its on-going projects. However, on a quarterly sequential basis revenue only grew marginally by +4.4% whilst profits was lower by - 53.7%qoq due to the downward pressure on margins for its MCM project in the current quarter.

FY19-20F earnings projections raised. Following the earnings announcement, we are raising our FY19-20F earnings on Deleum by +28.4% and +9.7% respectively to RM38.9m in FY19 and RM49.4m in FY20 given the better-than-expected 3QFY19 earnings and the brighter prospect of its plant and machinery segment.

Maintain NEUTRAL with a revised TP of RM1.11. Post earnings announcement, we are maintaining our NEUTRAL recommendation on Deleum with a revised target price of RM1.11 (from RM0.84 previously). Our TP is premised on an unchanged PER20 of 9.0x pegged to a higher EPS20 of 12.3sen post earnings revision.

We opine that our NEUTRAL recommendation is fair given that we foresee that Deleum will continue to face margin compression in its Oilfield Services segment especially in the contract that it won for OS late last year.

Furthermore, we continue to view its slow orderbook replenishment as a barrier to future earnings visibility given the current challenging operating environment for its OS segment. That said, we remain optimistic that Deleum’s niche in providing slickline services, turbine repairs and integrated corrosion solutions will remain as its key strength going forward which would place it at the forefront to win future contracts in those areas. Additionally, its dividend yield remains decent at 3.5% FY20F.

Source: MIDF Research - 22 Nov 2019