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DELEUM (5132) - Deleum: Why This Market Leader With 70% High-Quality Income Is On Analysts’ Radar

28 April 2015

The re-rating of oil and gas (O&G) players, triggered by the oil price crash, had oil stocks battered. Over the past year, the O&G index fared the worst among the FTSE Bursa Malaysia KLCI Industry Indices. Its relative return to the FTSE Bursa Malaysia KLCI was negative 24.7 percent for the one-year period till 31 March.

Deleum was not spared either. Along with the broader sell-off, shares of the offshore oil and gas service specialist plummeted 33 percent over the same period.

Yet, there was no noticeable damage to Deleum, which went on to post record earnings in the year ended 31 December 2014 (FY14). Quarterly profit numbers remained in an uptrend, with the fourth quarter registering the seventh consecutive interim the firm recorded growth on a year-on-year basis. In terms of earnings visibility, its order book of RM3.8 billion will keep the company busy till 2023.

Financial Performance From FY10 To FY14
Source: Company Annual ReportSource: Company Annual Report

Does this represent an opportune time to invest?

3-Pronged Growth
With a history dating back to 1982, Deleum provides a diverse range of supporting specialised products and services to the O&G industry, particularly in the exploration and production sector. It organises its businesses into three operating segments – power and machinery, oilfield services and maintenance, repair and overhaul.

The company has offices and facility bases located across Malaysia to support its operations that provides services mostly catered to brownfield projects.

Bulk of Deleum’s revenue and pre-tax profit are derived from the power and machinery segment. Working exclusively with world leading industrial gas turbine supplier Solar Turbine as its principal, Deleum is a leading supplier of small-capacity gas turbines in Malaysia. It command a 90 percent market share.

Having installed about 280 gas turbines packages that are largely used on offshore production platforms, this represents repair and maintenance as well as replacement opportunities.

Installation of lube oil connections
Installation of lube oil connectionsThe second largest revenue driver is the oilfield services division. Contributing about 22 percent and 31 percent to revenue and pre-tax profit respectively in FY14, this business segment is deemed where most of the firm’s growth will come from going forward.

More specifically, the Pan Malaysian Slickline contracts worth RM750 million for the provision of slickline services to offshore production facilities that Deleum bagged in 2013 have been providing the boost. By end FY14, the segment had deployed 53 slickline units compared to 26 slickline units operating in the previous financial year. The greater utilisation of slickline equipment is expected to improve the segment’s overall contribution, with the results being anticipated to materialise in FY15.

Long-term growth is also expected from its newly added asset integrated solutions business under its oilfield services and maintenance segment. The new area provides services and solutions to improve production in idle or underperforming wells. This represents a good opportunity for Deleum to expand as oil prices recover and the option to reactivate an idle or underperforming oil well might be more appealing for oil firms as they cost less than developing a new oilfield.

As for its maintenance, repair and overhaul line, it is a loss-making unit. The company has been working on enhancing its capabilities and competitiveness in the industry. In FY14, numerous improvement initiatives were implemented including a more rigorous sales framework envisaged to help market penetration and build stronger customers engagement, not only within the oil and gas industry but also across other industries.

Positive Operating Cash Flow
Since going public, Deleum has been posting positive operating cash flow since FY06. Barring FY14 where the company allocated RM131.6 million in capital expenditure to prepare the firm for future expansion, the positive operating cash flows had been more than enough to cover capital expenditure needed to maintain current operations and fund the company’s dividend payouts. Deleum has a 50 percent payout dividend policy.

Over the FY05 to FY14 period, the company saw its earnings grew at a compounded annual growth rate of some 15 percent. It is notable that performance held steady in FY09 and FY10 after crude oil lost three-quarters of its price mid-2008. This speaks volume of the company’s market leadership and recurring income stream.

Challenging Short-Term Outlook
While the company’s earnings visibility is backed by a RM3.8 billion order book that stretches to 2023, near-term growth might prove to be challenging.

National oil company Petroliam Nasional’s (PETRONAS) recent move to cut back on operating expenses, reportedly between 25 to 30 percent, will hit Deleum as its power and machinery segment’s work are largely on an “on-call” basis, which means it is dependent on PETRONAS issuing work orders. Coupled with the current softer oil prices, it seems like growth may be muted in the short term.

Still, the recurring income stemming from continued repair and maintenance activities for gas compressors, as well as full year operations of its slickline activities, of which 80 percent are on a “take-or-pay” basis, will act as a cushion.

Historically, about 80 percent of the company’s revenue is on a recurring basis. UOB Kay Hian expects the trend to continue, with recurring income forming 70 percent of its FY15 turnover forecast. The research house issued a “Buy” rating on the company, which is one of its favourite small-cap companies in the O&G universe. It has listed the securing of new jobs for its oilfield services division, especially the asset integrated solutions business, as a catalyst. It also assigned Deleum a target price of RM1.90, representing some 13 percent in potential gain.

As at time of writing, shares of Deleum are trading at about 11 times FY14 earnings with dividend yield of 4.5 percent.

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