KUALA LUMPUR: MIDF Research has initiated coverage on Deleum Bhd
with a “buy” recommendation with a target price of RM1.36 per share.
“Our target price is based on EPS17 of 13.6 sen pegged to PER17 of 10 times. Our target PER17 is based on its five year historical average rolling PER. At peak valuation, the stock traded at
PERs in excess of 18 times,” the research house said.
MIDF said Deleum managed to remain profitable growing at a compound annual growth rate of about 10% over the past five years despite operating in a very challenging environment.
It said Deleum’s revenue had been growing at a compounded annual growth rate (CAGR) of 10.4% for the past five years. Such growth rates can be attributed to the power and machinery (P&M) segment which is the largest revenue contributor at 71.7% of total revenue in FY15.
This is followed by the contribution from oilfield services (OS) and integrated corrosion solution (ICS) at 21.3% and 7% of total revenue respectively.
As for segmental revenue growth, the P&M segment has grown at a 5-year CAGR of 8% that was mainly contributed by its aftermarket sales and services being driven by its integrated facility centre in Senawang.
“As for earnings, Deleum recorded a robust 5-year CAGR of +9.3%. Despite tough operating environment stemming from low oil prices that led to a sluggish O&G capex rollout, Deleum still maintained to sustain its earnings for the past two years (FY14:RM59.3mil; FY15:RM45.7mil),” MIDF said.
It said this can be attributed to Deleum’s deliberate decision to increase the number of operational slicklines even though operating environments was tough in FY14/15.
“As a result, Deleum has been able to take 50% of Malaysia’s slickline market. In the same year, the maintenance, repair and overhaul (MRO) segment was renamed to ICS and the results of Deleum Rotary Services Sdn Bhd were reclassified to P&M segment. Consequently, this enhanced the operating profit of the P&M segment and stabilised ICS’s operating profit.
“We expect this to bode well for Deleum’s earnings sustainability in the coming future,” MIDF said, adding that Deleum’s balance sheet had been maintained in a modest manner reflected by gearing ratios ranging from 0.09 times to 0.14 times for FY2011 to FY2013, giving sufficient headroom for capex.
It added that Deleum had been consistently distributing approximately 50% of its net profit as dividends, offering a potential dividend yield of more than 5%. The latest payout was 3.5sen single-tier dividend in 3QFY15 which gives a net payout ratio of 48%.
“Moving forward, we are expecting Deleum to maintain payout ratios around 50% which at current price levels, should provide investors with a dividend yield of more than 5% per annum,” MIDF said.
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