KEY INVESTMENT HIGHLIGHTS

• Deleum Berhad’s 4QFY19 earnings came in below expectations at RM13.1m

• Higher revenue recognition from Power & Machinery segment cushioned earnings

• Oilfield Solutions reverted to losses with a LBT of -RM651m

• Softer margins on Sponge-Jet Blasting and lower MCM job execution dragged ICS segment

• FY20F earnings revised down by -23.1% to RM38.0m

• Maintain NEUTRAL with a lower TP of RM0.86 per share

4QFY19 earnings below expectation. Deleum Berhad’s (Deleum) 4QFY19 net profit came in at RM8.6m. This brings its FY19 cumulative earnings to RM33.1m which was below our and consensus’ full-year earnings estimates at 86% and 83% respectively. Comparing against 4QFY18, its revenue and earnings grew by +15.8%yoy and +14.6%yoy respectively. This was primarily driven by the higher sales from its power and machinery segment coupled with a sales growth from the SpongeJet blasting business. Meanwhile, on a quarterly sequential basis revenue declined by -21.7% whilst earnings dipped by -34.6%qoq respectively. This was due to lower contribution from both the oilfield services and integrated corrosion solution.

Power & Machinery. Segment revenue grew by +12.2%yoy whilst segment profit surged by +102.5%yoy respectively. The strong revenue and earnings growth during the quarter was primarily driven by: (i) robust demand for valves and flow regulator services; (ii) higher supply of local field service representative as well as; (iii) increase in the sales of turbine parts and other ancillary services. PBT margin has also improved to 14.2% vs 7.5% in 4QFY18. 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 by +15.1%yoy due to: (i) stronger contribution from GLV services; (ii) increase in jobs performed from well intervention and enhancement services; (iii) higher slickline services in East Malaysia region and; (iv) higher chemical sales generated under SCWS. This was however offset by margin compressions and slowdown in activities from its West Malaysia slickline operations which caused segment profit to revert to a loss before tax of -RM651.0m.

Integrated Corrosion Solutions. Meanwhile, revenue for ICS also grew by +26.4%yoy mainly due to the revenue growth from its SpongeJet Blasting business following the renewal of the Pan Malaysia Painting and Blasting Contracts (PMPBC). However, the segment recorded a loss before tax of -RM3,118m during the quarter due to lower job executions on its MCM contract and softer margins on its Sponge-Jet Blasting business.FY20F earnings projections trimmed. Following the earnings announcement, we are reducing our FY20F earnings on Deleum by -23.1% to RM38.0m as we opine that its oilfield services and ICS segments will continue to face headwinds and compressed margins into FY20. We have also introduced our FY21-22F numbers in this report.

Maintain NEUTRAL with a lower TP of RM0.86. Post earnings announcement, we are maintaining our NEUTRAL recommendation on Deleum with a lower target price of RM0.86 (from RM1.11 previously). Our TP is premised on an unchanged PER20 of 9.0x pegged to a lower EPS20 of 9.5sen 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. Its dividend yield remains decent at 3.4% FY20F.

Source: MIDF Research - 27 Feb 2020