DELEUM ... Mar11

Alliance Research ... Light in asset, rich in cash

INVESTMENT HIGHLIGHTS
􀂉 Background. The history of Deleum Group can be traced back to the incorporation of Delcom Services in 1976 and commenced business in 1978. Its initial business activity was the supply of telecommunications equipment. With years of experience in the oil and gas industry, Deleum Group is a provider of supporting specialized products and services to the oil and gas industry. Specifically Deleum is chiefly involved in offering a wide spectrum of supporting specialized products and services to the oil and gas sector, focusing specifically in the exploration and production segment.

􀂉 Investment case. The stage is set for a boom time in EPCIC oil and gas projects in Malaysia underpinned by heightened oil and gas exploration and production (E&P) activities in Malaysia, which is expected to gain momentum over the next few years. Amplifying the growth potential, E&P activities in Malaysia going forward are expected to focus in the deepwater and ultra-deepwater blocks. We believe Deleum is poised to be a beneficiary considering its track record in providing a wide range of specialised supporting products and services for the oil and gas industry.

􀂉 Forecasting FY11 and FY12 net profit of RM28m and RM29m respectively. Taking the cue from the positive outlook in the oil and gas sector locally, we are forecasting Deleum FY11 and FY12 net profit to hit RM28m and RM29m respectively. We derive our target price of RM2.07/share based on 7.4x CY11 EPS of 28 sen or at a 40% discount to comparable peers average of 12.3x PER taking into account of Deleum’s small market capitalisation.

􀂉 Key investment risk. Key earnings risk for Deleum lies from worst-than-expected weather conditions, which hampered offshore activities in carrying out services.

􀂉 Financial review. Full-year FY10 contribution is mainly derived from the specialised equipment and
services segment and oilfield equipment and services segment. YTDFY10 revenue fell 22% to RM399m. However, YTDFY10 Deleum’s Group pre-tax profit declined 18% to RM38m. Full-year FY09 contribution is mainly derived from the specialised equipment and services segment and oilfield equipment and services segment. The Group recorded revenue of RM514m for the financial year 2009, a 21% increase compared to RM425m in the previous year. In line with the increase, the Group achieved a 24% increase in profit before tax of RM46m compared to RM37m in 2008. The profit after tax and minority interest increased by 14% from RM23.3m in 2008 to RM26.5m.

Valuation and earnings outlook
􀂉 Forecasting FY11 and FY12 net profit of RM28m and RM29m respectively. Taking the cue from the positive outlook in the oil and gas sector locally, we are forecasting Deleum FY11 and FY12 net profit to hit RM28m and RM29m respectively.

􀂉 Initiating coverage with a Buy recommendation. We derive our target price of RM2.07/share based on 7.4x CY11 EPS of 28 sen or at a 40% discount to comparable peers average of 12.3x PER taking into account of Deleum’s small market capitalisation. We like Deleum for: 1) being the booming oil and gas sector; 2) boom time ahead for EPCIC deepwater oil and gas projects in Malaysia; and 3) Its asset light and cash rich business model. With values for oil & gas contracts getting higher, re-vitalised domestic spending by Petronas, positive liquidity flow against on the back of the government’s Economic Transformation Programme to create regional oil and gas service provider champions in providing oil field & equipment services underpin our continued excitement in the sector over the short to medium term.