Investment Highlights

• We maintain BUY on Deleum with a higher fair value (FV) of RM1.27/share (from RM1.22), pegged to a rolled-forward FY24F PE of 9x – 1SD below the Malaysian oil and gas operators’ average of 10.5x due to the short-term profile of the group’s contracts. Our FV also implies an unchanged 3- star ESG rating (Exhibit 5).

• We maintain our forecast for Deleum as the results were within our expectation with 9MFY23 core net profit (CNP) of RM30.5mil coming in at 75% of our FY23F earnings but above street’s at 84%. As a comparison, 9MFY22 accounted for only 53% of FY22 core net profit.

• No dividend was announced for the period, which brings 9MFY23 DPS to 2 sen - 52.6% of our FY23F dividend based on a dividend payout ratio of 50%.

• YoY, 9MFY23 revenue rose by 49.4% due to the power and machinery (P&M) segment’s higher sales value and volume of equipment traded, which more than offset the declines in the other divisions. 9MFY23 CNP saw a corresponding rise by 53.7% from higher P&M operating margins of 13.9% (vs. 11.5% in 9MFY22) and higher net interest income.

• QoQ, 3QFY23 revenue rose by 28.6% following topline improvement from the P&M segment. This was partly offset by broad declines in other segments: (i) lower slickline and gas lift valve activities in West and East Malaysian regions, and (ii) lower maintenance works in Indonesia as well as for maintenance, construction, and modification (MCM) jobs. However, 3QFY23 CNP saw a smaller rise of 12%, partly dampened by the oilfield and ICS segments which recorded losses from weaker economies of scale due to weak topline performance.

• The group has obtained RM107mil contract worth of solid control job wins, bringing outstanding orderbook for oilfield services to RM189mil as at 30 September 2023.

• We continue to like Deleum, premised on the recovery of its loss-making ICS operations against the backdrop of a stronger tender environment. Recall that management previously guided for orderbook wins to improve significantly as early as 1QFY24 as Petronas had begun to issue tenders for its MCM works which could be worth up to RM8bil.

• Stripping out the group’s net cash of RM228mil as at endSep 2023 from the market cap, Deleum currently trades at an unjustified FY24F PE of only 3x vs. the sector’s 2-year average of 10x.

Source: AmInvest Research - 29 Nov 2023