By Stephanie Jacob
As oil producers cut opex, O&G services providers such as Deleum Bhd are feeling the impact. How bad will slowing or halt in operations expansion hit Deleum?
Business model: Deleum Bhd is a services provider in the oil and gas (O&G) sector. It was established in 1982 as Deleum Services Sdn Bhd and subsequently listed on the Main Board of Bursa Malaysia in June 2007.
The group has three core segments, power and machinery (P&M), oilfield services and integrated corrosion services (ICS).
Alliance DBS Research describers Deleum as “a market leader for the supply, maintenance and repair of Solar brand gas turbines as well as slickline services in Malaysia. The company also has a growing reputation for enhancing production via tailored and proprietary chemical solutions and corrosion control via the Sponge-Jet technology”.
It has significant exposure to Petronas and its order book includes Pan Malaysian contracts. While this gives it some stability, Alliance DBS said that its orders have declined. And there are concerns that it will feel the pinch with Petronas’ operating expenditure (opex) cuts.
Shareholders and management: Deleum is led by group managing director Nan Yusri Nan Rahimy. He joined the group in 1996 as a marketing executive before being redesignated to the role of application engineer.
Subsequently he has held senior posts such as assistant vice-president of business development, vice-president of the exploration and production division, chief operating officer of the oilfield services division and then chief executive officer of Deleum Oilfield Services Sdn Bhd.
Its non-executive chairman is Izham Mahmud who was appointed in 2000. While non-independent and non-executive deputy chairman is Vivekananthan MV Nathan who was formerly with Esso Malaysia and Mobil, before becoming one of the founders of Deleum Services.
Share performance: According to Bloomberg, Deleum has been trading in a 52-week range of 0.79 sen to RM1.87. The group has a market capitalisation of RM468 million as of Nov 26, 2015.
It has a one-year return rate of -34.58% and therefore has underperformed the FBM KLCI which has a return rate of -5.79%.
According to Reuters, the group has a beta coefficient of 2.1, and is therefore trading above the overall market volatility. A value of 1 reflects the average volatility of the stock market.
What analysts think: Deleum’s third quarter for financial year 2015 (3Q15) results came in below expectations, prompting downgrades by analysts.
UOB Kay Hian said Deleum’s disappointing results had been caused by a few negative surprises. Firstly is the poor performance from its retrofit of spares and engines segment which offset a resilient performance by maintenance and overhaul services for gas turbines, in the P&M division.
Secondly, its oilfield services segment saw earnings before interest and taxes (Ebit) losses due to slower demand for chemical and production solutions. There was also a lower utilisation of Deleum’s slickline units.
The research house has reduced its financial year 2015 (FY15) to FY17 earnings forecasts by 29% to 32%. It cut its Ebit margin assumptions for Deleum’s oilfield and slickline contracts to 10% from 15%. And expects Ebit margins for ICS jobs to be suppressed at single-digit margins given the volatility in the industry. It assumes a 2015 to 2017 revenue decline of 10% due to slower activities.
UOB Kay Hian is also concerned that heightened business risks may result in lower future profits and dividends. Aside from a 2 sen interim dividend announced in 2Q15, there is a risk that Deleum will not meet its earlier forecast of a dividend per share of 7 sen.
It has advised investors to take profits. In line with the 3Q15 results, it has since lowered its target price to RM1.10 which translates into a lower 1.4-time FY16 forecast price-to-book ratio. Deleum has been downgraded to “sell” from “hold”.
Alliance DBS Research has also downgraded Deleum to “hold” from “buy”. It has a target price of RM1.30 which is based on a FY16 forecast earnings per share which is pegged to a 10-time price-earnings ratio.
The research house is concerned over Deleum’s exposure to Petronas given the latter has said it will cut its opex by 25%. This is expected to reduce demand for Deleum’s services. There is also concern that demand for well reactivation services will slow given that the group has been trying to develop this segment.
Earnings forecast:
StockStalk: It has been a tough year for all O&G-related companies. As oil producers have reduced their opex, companies offering O&G related services like Deleum are seeing their order flows start to slow.
Deleum is a niche brownfield service provider with heavy exposure to Petronas. That would usually be enough to provide some reassurance, and to an extent it still does. However, given Petronas’ own recent dismal results and its announcement that it will cut opex by 25%, it will be worrying times at Deleum.
Its share price has fallen 70 sen year-on-year from RM1.86 on Nov 26, 2014 to RM1.16 on Nov 26, 2015. And there is nothing to suggest that there will be a strong recovery in its share price soon as this will mean an unlikely and significant improvement in oil prices and the oil producers increasing their opex again.
As with the rest of the O&G stocks on Bursa, tough times look set to continue for Deleum, at least in the near term.
The one bright spot for Deleum’s investors, or something prospective investors might consider its that its dividend yield expected to remain attractive at least for this year, with Alliance DBS saying it expects it to remain above 5%.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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