Deleum Bhd
(Sept 10, RM1.13)
Maintain buy with an unchanged target price (TP) of RM1.65: Deleum Bhd is a market leader for the supply, maintenance and repair of Solar-brand gas turbines as well as slickline services in Malaysia. It also has a growing reputation for enhancing production via tailored and proprietary chemical solutions, and corrosion control via Sponge-Jet technology. 

Deleum’s order book extends until 2023. Key contracts supporting earnings include a 10-year turbomachinery contract (RM2 billion estimated outstanding for Solar turbines) from Petroliam Nasional Bhd (Petronas), take-or-pay provision of slickline equipment and services (RM600 million estimated outstanding), and other contracts for corrosion control and chemical supplies which are pan-Malaysian in nature. 

A healthy growth of 7% to 10% per annum in the financial year ending Dec 31, 2016 (FY16) to FY17 is realistic to expect with the resilient nature of brownfield services. First half of FY15 earnings were stable year-on-year, with a steady work order flow as stipulated under main contracts and new work for corrosion control awarded recently. 

We maintain our “buy” recommendation on Deleum. Our TP of RM1.65 is based on FY16F (forecast) earnings per share pegged to 10 times price-earnings ratio. Dividend payouts are stable with an attractive yield of more than 6%. Key risks to our view include a prolonged downturn in the offshore market, which could result in margin compression as Petronas might look to further renegotiate its operating costs downwards, and demand for new gas turbines could continue to be sluggish. — AllianceDBS Research, Sept 10

This article first appeared in digitaledge Daily, on September 11, 2015.