This article first appeared in The Edge Financial Daily on November 22, 2018

Deleum Bhd
(Nov 21, RM1.03)
Maintain buy with an unchanged target price (TP) of RM1.39: Deleum Bhd’s third financial quarter ended Sept 30, 2018 (3QFY18)

reported earnings declined by 15.6% year-on-year (y-o-y) to RM9.1 million.

Despite recording cumulative earnings below our full-year earnings estimate, the figure for the cumulative first nine months ended Sept 30, 2018 of RM19.7 million was 4.6% higher y-o-y.

We remain optimistic that earnings for Deleum will continue to be buoyed by high activity levels in 4QFY18, given that it is generally a stronger quarter operationally for Deleum.

The power and machinery segment’s revenue and profit contracted by 26.3% y-o-y and 24.3% y-o-y respectively.

This was attributable to: i) softer demand for valves and flow regulators and; ii) a lower volume of turbine-related work orders for exchange engines and ancillary parts and services. This was, however, offset by higher orders for retrofit projects.

The oilfield service segment’s revenue increased by 7.5% y-o-y due to higher revenue from slick-line services of RM5 million.

That said, segmental profit was reduced by 34.4% y-o-y due to downward pressure on margins, which was partially mitigated by reduced finance costs due to lower borrowings.

Segmental revenue for integrated corrosion solutions surged by 311.9% y-o-y due to additional revenue generated from MCM services despite reduced contributions from the pan-Malaysia blasting contract which expired in November 2017.

Furthermore, the segment staged a turnaround with a profit of RM200,000 during the quarter after two consecutive quarters of losses.

We have made no changes to our earnings estimates at this juncture as we expect Deleum’s 4QFY18 earnings to come in stronger premised on noticeable increases in activity levels driven by stronger crude oil prices.

Furthermore, with the turnaround of its integrated corrosion solutions and recently secured contracts for the segment, we opine that it will contribute more positively in 4QFY18.

We have maintained our “buy” recommendation on Deleum, with an unchanged TP of RM1.39. At peak valuation, the stock traded at price-earnings ratios in excess of 18 times. — MIDF Research, Nov 21