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Deleum Bhd
(Dec 5, RM1.61)
Maintain “hold” with a target price (TP) cut to RM1.65.
We expect crude oil price to drop to US$70 (RM243) to US$80 a barrel in 2015 compared with our previous assumption of US$95. But there will be minimal impact on Deleum’s earnings because the group services offshore brownfield developments.

Key service contracts in its RM3.8 billion order book are a 10-year service agreement for turbomachinery services involving small gas turbines, and a five-year well maintenance contract to provide slickline services.

We trimmed financial year 2014 to 2016 forecast (FY14 to FY16F) earnings by 2% to 5% as we now expect the maintenance, repair and overhaul (MRO) division to break even at best, instead of turning around. Despite healthy flow of MRO work orders, the division had reverted to losses in recent quarters due to weaker margins and higher operating expenses.

We cut TP to RM1.65 from RM1.90 previously, after downgrading earnings and target valuation to 10 times price-earnings ratio from 11 times, following the broad oil and gas sector derating. But we would “hold” the stock as Deleum has a 50% dividend  payout policy, which at the current share price implies an attractive 5.3% yield (FY15F divided per share).

Deleum has 90% market share in the sales, repair and maintenance of Solar brand gas turbines in Malaysia, which are used in offshore production facilities. The group has secured long-term Pan Malaysian service contracts from Petroliam Nasional Bhd that is extendable to year 2023 for the repair and maintenance of these turbines, as well as to be a core supplier in Malaysia via their exclusive partnership with Solar. These contracts are worth RM2.5 billion.

The group made headway in the well maintenance services market in 2013, securing Pan Malaysian contracts worth RM700 million to provide slickline services to offshore production facilities. These services will be a key earnings driver for the next few years.

Deleum is unique compared with peers, because of its focus on brownfield services. As such, we expect minimal impact on power and machinery and oilfield services earnings. Note that during the 2009 industry downturn, group earnings had remained resilient.

Deleum has a 50% dividend payout policy, and is offering attractive yields of more than 5%. — DBS Alliance Research, Dec 5

This article first appeared in The Edge Financial Daily, on December 8, 2014.

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