28 February 2017 4QFY16 Results Review Deleum Berhad Earnings visibility intact INVESTMENT HIGHLIGHTS Deleum Berhad s (Deleum) 4QFY16 reported earnings rose two folds quarter-over-quarter to RM9.9m Margin expansion for both Oilfield Services and Integrated Corrosion Solution divisions Orderbook remains strong at approximately RM2.5b with burn-rate of four years 3.5sen dividend declared for FY16 Maintain BUY with revised TP of RM1.18 per share Improving earnings quarter-over-quarter. Although Deleum s reported earnings declined by -25.9%yoy to RM9.9m, it grew by two folds on a quarterly sequential basis to RM9.9m corroborating our view that earnings will continue to improve in 4QFY16 into FY17. Excluding exceptional items such as impairments and write-offs on PPE and inventories and forex losses, the company s full year FY16 normalised earnings would have been RM36.6m. Prospects buoyed by strong orderbook. Deleum s orderbook remains buoyant at approximately RM2.5b representing a burn-rate of around four years. Earnings visibility continues to remain intact. Power & Machinery (P&M). On a quarterly sequential basis, segment revenue and profitability increased by +59.8% and 139.9% respectively as a results of secured higher work orders for exchange engines, retrofit projects and valves and flow regulators coinciding with customers' maintenance cycles. Oilfield Services (OS). Quarterly segment revenue also expanded by +11.9%yoy to RM36.3m mainly attributable to higher slickline utilisation. However, profitability declined due to change in sales mix and a higher costs to serve mainly equipment rental and consumables Integrated Corrosion Solution. The ICS segment is also performing well with both revenue and profitability increasing by +11.5%qoq and +1248%qoq. Segment profit margin expanded by +7.2ppts to 9.3%. Impact on earnings. We take this opportunity to fine tune our FY17 by -3.6% to better reflect current profit margins in challenging environments. Maintain BUY Revised Target Price (TP): RM1.18 (previously RM1.25) RETURN STATS Price (27 February 2017) Target Price RM1.01 RM1.18 Expected Share Price Return +16.8% Expected Dividend Yield +3.9% Expected Total Return +20.7% STOCK INFO KLCI 1,693.84 Bursa / Bloomberg Board / Sector Syariah Compliant 7113 / DLUM MK Main / Trading Services Yes Issued shares (mil) 400 Par Value (RM) 0.50 Market cap. (RM m) 404.0 Price over NA 1.4 52-wk price Range RM0.82-RM1.28 Beta (against KLCI) 1.86 3-mth Avg Daily Vol 0.193m 3-mth Avg Daily Value Major Shareholders (%) RM0.19m Lantas Mutiara 20.43 Hartapac Sdn Bhd 12.04 Nathan Vivekananthan 10.70 Mustaffa Zaiton 8.05 IM Holdings 6.09 MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
2 Silver lining. We are anticipating lumpy orders to be placed in FY17. In addition, the announcement for the maintenance, construction and modification (MCM) works for the Malaysian production sharing contractors involving topside maintenance, hook-up and commissioning and facilities improvement works could be announced soon. We are estimating Deleum s portion to be approximately RM500m and this will be booked under its Integrated Corrosion Solutions division. Maintain BUY. Given the company s strong orderbook with a burn-rate in excess of four years, we are maintaining our BUY recommendation on a revised target price of RM1.18 per share. Our target price is based on EPS17 of 13.1sen pegged to PER17 of 9x. Our target PER17 is based on the company s long term historical average rolling PER. At peak valuation, the stock traded at PERs in excess of 18x. INVESTMENT STATISTICS Income Statement (RM m) 2014 2015 2016 2017F 2018F Revenue 657.3 649.4 608.7 674.2 742.9 Gross Profit 158.0 149.2 12.5 168.6 185.7 Operating Profit 82.2 72.2 54.2 74.7 83.5 Profit Before tax 92.0 71.2 49.8 68.2 77.6 Tax expense -21.4-16.7-16.9-15.7-17.8 Net Profit 70.6 54.5 26.5 52.6 59.7 Earnings per share (sen) 14.8 11.4 6.6 13.1 14.9 Dividend per share (sen) 7.5 5.5 3.5 4.1 4.6 PER (x) 6.3 8.3 8.2 7.2 6.3 Source: MIDFR, Company Orderbook No. Contracts Expiry year 1 Provision of Painting and Alternative Blasting 2017 2 Thermo-chemical Solid Deposition Treatment Technology 2018 3 Provision of Integrated Wellhead Maintenance Services 2018 4 Supply of PDC & Rock Bits 2018 5 Supply & Services for Casing Centralizer Equipment 2019 6 Provision of Slickline Equipment & Services 2019 7 Provision of Well Control Services 2020 8 Long Term Service Agreement for Gas Turbine 2023 9 Supply of Gas Turbine Packages 2023 Approximate contract outstanding value RM2.5b Source: Estimates by MIDFR, Company
3 DAILY PRICE CHART Aaron Tan Wei Min aaron.tan@midf.com.my 03-2772 1650
4 4QFY16 RESULTS SUMMARY FYE Dec (RM' m) Quarterly Results Cumulative 4Q16 QoQ (%) YoY (%) FY15 FY16 YoY (%) Revenue 201.3 44.6-0.8 649.4 608.7-6.3 Cost of sales -160.1 47.3 0.7-500.2-480.1-4.0 Gross profit 41.2 34.7-6.1 149.2 128.5-13.8 Other income 0.4-9.8-32.4 2.2 2.1-6.2 Selling and Distribution costs -8.8 55.3-14.0-31.7-28.1-11.2 Administrative costs -9.3-17.2-21.8-49.7-44.3-10.8 Other operating gains/ (expenses) -4.7 31.9 261.5 2.1-4.0-284.1 Operating profit 18.7 78.5-10.6 72.2 54.2-24.9 Finance cost -1.2-6.6-26.2-7.4-5.3-28.1 Share of results of a JV 0.2 3.2-1569.2 0.8 0.7-11.7 Share of post tax profits of associates 0.0-121.6-107.4 5.6 0.2-96.0 Profit before tax 17.7 91.5-6.5 71.2 49.8-30.1 Tax expense -5.3-3.6-4.6-16.7-16.9 1.8 PATAMI 9.9 195.2-25.9 45.4 26.5-41.6 Segmental Breakdown: Revenue Power and Machinery 151.8 59.8-0.1 465.9 429.1-7.9 Oilfield Services 36.3 11.9-1.9 137.9 135.5-1.8 Integrated Corrosion Solution 13.1 11.5-5.5 45.2 43.6-3.6 Operating Profit Power and Machinery 12.9 139.9-32.7 63.8 35.9-43.8 Oilfield Services 1.9-64.2 168.7 8.3 12.5 50.9 Integrated Corrosion Solution 3.4 1248.6 158.7 1.0 4.1-526.1 Source: MIDFR
5 MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. SELL TRADING SELL Total return is expected to be <15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months.