Investment Merits

• Niche player in the upstream oil & gas (O&G) services segment with dominant positions in respective markets
• Sustained power and machinery (P&M) earnings, and potential
• turnaround in the oilfield services (OS) and integrated corrosion solution (ICS) segments
• Strong balance sheet with a significant war chest allows for further
• expansion via inorganic growth

Company Profile

Deleum, established in 1982, is an integrated solutions provider in the O&G upstream segment. It has three core businesses: P&M, OS and ICS (see above for the full terms).

Highlights

More growth from the existing O&G business. The P&M segment, which is the major revenue contributor (accounting for 84% of FY23 topline), delivered a stellar performance last year, with revenue growth of 32%. This was mainly on the back of higher sales and volume of exchange engines delivered, increased revenue from control & safety valves and flow regulators services, sales of turbine parts and repairs, and contributions from mechanical and processes projects. We believe the revenue base is likely to be sustainable, backed by a strong order backlog.

Potential turnaround of OS and ICS segments. Meanwhile, the other two segments – OS and ICS – are likely to see a turnaround this year with higher work orders. Currently, Deleum’s orderbook stands at MYR553m (as of 4Q23), largely contributed by the P&M (58%) and OS segments. Deleum is tendering for more than MYR1.4bn worth of jobs – largely dominated by the OS and ICS wings. For the latter, management is aiming for Pan-Malaysia maintenance, construction and modification or MCM jobs, and other long-term contracts. We also expect the cost base for the OS segment to be lower in FY24, having already incurred the bulk of the maintenance expenses and refurbishment costs for the equipment (including slickline) last year. Starting from 2024, the business unit is likely to benefit from higher service rates and work orders (ie solid control services) from clients.

Tap on regional expansion via M&As. In early March, Deleum proposed to acquire a 70% stake in valves company OSA Industries Indonesia (OSAII) for USD7m. OSAII repairs machinery for special purposes, and is engaged in the wholesale trade of machinery, equipment, and other equipment. Deleum sees further growth opportunities ahead, riding on the growing downstream sector, as evidenced by state-owned Pertamina’s Refinery Development Master Plan. The company is undertaking the process of due diligence and targets to complete the acquisition by 3Q24.

Widening product offerings. According to The Edge, Deleum still needs another 6-8 product lines to become a complete service provider. Its net cash of MYR213m (as of 4Q23) allows it to explore inorganic growth via M&As. One of the ways is to invest in minority stakes at the early stage of tech-linked upstream O&G companies, to widen Deleum’s product offerings within the oilfield services segment. In early March, the company acquired minority stakes in two firms: MYR4.7m for a 7.7% stake in LatConnect60 and Paradigm Technology Service. The former is an Australia-based start-up tech firm that provides earth observation and data analytics services to the Australian government and commercial clients, while the latter offers innovative products such as fully coated slickline and bi-directional communication systems named “Slick-E-Line” and “ParaComm” to revolutionise traditional slickline operations. Media reports state that LatConnect60 has proof of concept with a regional oil company, and recently explored a collaboration with a Halliburton-linked carbon accounting and emissions management digital solutions provider. Such investments may not contribute material earnings in the medium term, but we see long-term growth potential once the scaleable products are commercialised.

Company Report Card

Results review. FY23 core earnings increased by 21% YoY to MR45m on the back of a doubling P&M segment, which masked weaker OS and ICS segments that were posting operational losses. Meanwhile, Deleum also maintains a decent dividend payout ratio of 50%.

Management. Founder and Non-Independent & Non-Executive Deputy Chairman Datuk Vivekananthan MV Nathan, as well as Group CEO Ramanrao Abdullah (who has more than 26 years of experience in the O&G industry), helm Deleum.

Investment Case

We like Deleum for being a niche player in the upstream O&G services segment, with dominant positions in respective markets. While we see growth from its existing businesses, we like its strong balance sheet and significant war chest, which enables it to further expand via inorganic growth.

Based on an ascribed P/E range of 10-12x on 2025F earnings, we derive a FV range of MYR1.73-2.06. Our ascribed valuations are in line with and at a slight premium to the Bursa Malaysia Energy Index, which is currently trading at 11x P/E.

Key risks: i) Weaker-than-expected work orders from clients, ii) significantly lower-than-expected oil prices that could limit client spending, and iii) higher-than-expected operating costs.

Source: RHB Securities Research - 15 May 2024