Investment Highlights

• We maintain BUY on Deleum with an unchanged fair value of RM1.02/share, pegged to FY23F PE of 11x (10% below Malaysian oil & gas (O&G) operators’ average of 12x) together with a 3% discount to our ESG rating of 2 stars given that one of its core operations is still blacklisted from Petronas’ tenders.

• Our forecasts are unchanged as Deleum’s 9MFY22 core net profit (CNP) of RM20mil (+3.2% YoY) was broadly in line with expectations at 56% of our FY22F earnings and street’s estimates. This is premised on robust earnings contributions in seasonally stronger 4QFY22 against the backdrop of elevated activities in the O&G sector.

• As a comparison, 9MFY21 CNP of RM7mil represented only 25% of FY21 CNP of RM26mil. The group did not declare any dividend for the quarter, which is widely anticipated.

• 9MFY22 revenue of RM370mil came in flat YoY due to the weaker contribution from the power and machinery (P&M) segment which more than offset revenue growth from other operating segments. Despite the stagnant topline growth, higher profit margin, particularly from oilfield services (OS) and integrated corrosion solution (ICS) segments, spurred earnings, leading to a stellar 3x surge in 9MFY22 CNP.

• QoQ, Deleum’s 3QFY22 CNP moderated slightly by 2% to RM8mil despite a 12% rise in revenue to RM141mil as a result of lower profit margin from increased operating expenses coupled with a higher effective tax rate by 4%-point. Note that oilfield services unexpectedly recorded a 3QFY22 pretax loss of RM1.3mil (vs pretax profit of RM3.5mil in 2QFY22), mainly weighed down by lower revenue (-17% QoQ) together with heightened operating expenses.

• P&M’s share of group pretax profit in 3QFY22 climbed to 64% from 61% in 2QFY22 on higher sales of control and safety valves while integrated corrosion solutions stepped up to 43% from 10% in 2QFY22 given the oilfield services’ losses.

• On the other hand, we are impressed by the 26% QoQ rise in outstanding order book to RM447mil as at end-3QFY22, up from RM355mil in 2QFY22 amid higher opex and capex spending by oil majors. We opine that the rise in order book could be partially from several project extensions from existing clients, who were previously hinted at by management. The tender book also remains sturdy at RM400mil, providing further potential growth to near-term earnings.

• Deleum’s 3QFY22 net cash balance of RM184mil already represents 58% of its current market cap. Based on the group’s earnings trajectory, we estimate that its cash balance will almost rival its current market cap by end-FY24F.

• Deleum is currently trading at an unjustified FY23F PE of 8.3x, 31% below the sector average of 12x. Stripping out the group’s net cash from the market cap, the stock trades at a bargain FY23F PE of only 3.5x while offering a compelling dividend yield of 6%.

Source: AmInvest Research - 30 Nov 2022