PETALING JAYA: Despite the weak outlook for the oil and gas industry, and its cost-cutting measures, Deleum Bhd is expected to maintain its dividend payout of 50% to shareholders.
According to UOB Kay Hian, Deleum’s strong cash flow will support its dividend payment to shareholders and loan repayments to its creditors.
“Despite the weak profitability which is an industry-wide phenomenon, Deleum’s operating cash flow surged 10 times year-on-year (y-o-y) to RM57mil in the first half of 2020. This was largely helped by better working capital, even though EBITDA (earnings before interest, tax, depreciation and amortisation) declined y-o-y from RM29mil to RM24mil, ” UOB Kay Hian wrote in its report following a management meeting last week.
“The group guided that the better working capital position is sustainable, ” the brokerage added.
Deleum’s strong cash balance of RM160mil year-to-date demonstrates that the company still has one of the strongest balance sheets in the industry, UOB Kay Hian said.
“Deleum does not foresee any issue repaying the RM56mil short-term loans, out of its outstanding total loans of RM75mil.
Deleum re-iterated that it has no plans to change its 50% dividend payout (its dividend policy) for 2020, ” it noted.
Deleum had kick-started its cost optimisation process since the second quarter of this year. It had achieved savings of RM15mil in operating expenditure (opex) year to date.
The group said it plans to cut its budgeted opex for 2020 by RM25mil-RM26mil.
Deleum is expected to see a rebound in revenue in the third quarter of 2020, said UOB Kay Hian.
“This is particularly for the oilfield services segment, which is mostly dominated by the slickline contracts. However, the Integrated Corrosion Services segment has not enjoyed this recovery, as the modification, construction and maintenance segment is still seeing low activity, ” the brokerage noted.
While activity recovery would likely continue into 2021, Deleum’s management did foresee activities returning to pre-Covid-19 levels, UOB Kay Hian said.
“Nevertheless, there has been no termination of contracts, only deferrals. In terms of margins, management opines that the industry had never recovered from the margin squeeze during the previous 2014-15 downturn, and due to the current fall in activities, the industry is unable to offer further discounts on service rates, ” it said. Meanwhile, Deleum would expect its the power & machinery (P&M) earnings to continue to show resilience even though some revenue deferments might still exist for the rest of 2020.
UOB Kay Hian maintained its buy recommendation on Deleum, a lower target price of 62 sen, compared with 72 sen previously.
The revised target price is pegged to 10 times forward earnings, and it implies a dividend yield of 4% for 2020.
“Although Deleum is still highly dependent on local upstream work orders, it should be more resilient versus other upstream service players, given its recurring P&M business, ” UOB Kay Hian said.
“Also, Deleum’s strict dividend policy of 50% and strong cash flow management set it apart from other oil and gas peers, ” it added.
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