News Flash

(Member of Alliance Bank group) PP7766/03/2013 (032116)

Deleum Bhd
Oil & Gas

Buy
Bloomberg Ticker: DLUM MK | Bursa Code: 5123

7 January 2013
Analyst Arhnue Tan arhnue@alliancefg.com +603 2604 3909

Expanding into renewable energy

Last week, Deleum announced that it has accepted an offer to purchase a 50% stake in NSE Resources Corp, a company involved in the supply of specialty chemicals and renewable energy for a tentative consideration of RM21.3m. Financial details have yet to be disclosed but we expect synergistic benefits from the said acquisition. We maintain our BUY recommendation pending more details and highlight that Deleum pays strong dividends, with an expected 6.9% net yield in FY12, and 7.3% net yield in FY13.

12-month upside potential Target price Current price (as at 4 Jan) Capital upside (%) Net dividends (%) Total return (%)

2.39 1.91 25.4 7.3 32.7

Whats in the news

Key stock information Syariah-compliant? Market Cap (RM m) Shares outstanding (m) Free float (%) 52-week high / low (RM) 3-mth avg volume ('000) 3-mth avg turnover (RM m) Share price performance 1M Absolute (%) 6.1 Relative (%) 1.2

Yes 286.5 150.0 18.5% 1.97 / 0.99 58.2 0.1 3M 7.3 5.4 6M 9.0 4.4

Deleum announced that it has accepted an offer made by NSE Resources Corporation (M) Sdn Bhd (NSERC) to subscribe for new shares to be issued by NSERC, representing a 55% equity interest in NSERC for a total consideration not exceeding RM23.1m. The core business of NSERC is the provision of specialty chemicals and renewable energy. Deleum rationalises that the acquisition will allow the group to venture into the renewable energy industry and synergise with the groups industrial power generation business. The transaction is subject to a legal, technical and financial due diligence on NSERC by Deleum while the final subscription price is subject to an independent valuation to be undertaken by Deleum. This transaction is expected to be completed by 31 March 2013.

Our comments

Share price chart

We are neutral on the news for now, given the lack of information at this juncture. Financial data is yet to be available on NSERC and will be provided by Deleum in due course. We do acknowledge that the deal is expected to synergistic, given NSERCs capabilities of building small renewal energy plants. Deleum themselves have had several power generation projects, one in Cambodia and another for KLCC. The group also regularly supplies gas turbines for land based power generation needs, although O&G gas turbine supply continues to be the mainstay of their business. Looking through the NSERC website, we note that they also have interest in the palm oil sector, and appear to have technology to improve oil extraction. Besides that, in the specialty chemicals business, the group supplies water treatment chemicals and also oilfield chemicals which are likely items like drilling fluids. To note, Deleum does have an interest in the specialty chemical business via 30% associate Malaysian Mud and Chemicals. We believe Deleum is likely to pay for the 50% interest in NSERC in cash. As at end 3Q12, the group had net cash of RM63.6m and have indicated their intention to use this for acquisitions. Deleum does not have a history of gearing up significantly for acquisitions.

Valuation and recommendation

We maintain our BUY recommendation and look forward to further details on this deal. We value Deleum at RM2.39/share based on FY13 P/E of 8.2x which is inline with the groups peak cycle average P/E. We highlight that Deleum is expected to pay out 13.2sen in dividends by end FY12, translating to a net yield of 6.9%. This is based on a 48% net payout ratio which the group has consistently been paying in previous years. Going into FY13, we expect the dividend yield to increase to 7.3%.

All required disclosure and analyst certification appear on the last two pages of this report. Additional information is available upon request. Redistribution or reproduction is prohibited without written permission

News Flash | Deleum Bhd | 7 January 2013

Figure 1 : Key financial data FYE 31 Dec Revenue (RM m) EBITDA (RM m) EBIT (RM m) Pretax profit (RM m) Reported net profit (RM m) Core net profit (RM m) EPS (sen) Core EPS (sen) Alliance / Consensus (%) Core EPS growth (%) P/E (x) EV/EBITDA (x) ROE (%) Net gearing (%) Net DPS (sen) Net dividend yield (%) BV/share (RM) P/B (x)
Source: Alliance Research, Bloomberg

FY10 399.0 58.8 46.1 37.6 23.2 23.2 15.5 15.5 (12.1) 12.3 3.1 13.5 0.0 11.5 6.0 1.15 1.7

FY11 396.3 62.7 50.3 45.7 29.0 29.0 19.4 19.4 24.9 9.9 2.9 15.4 0.1 9.3 4.9 1.26 1.5

FY12F 449.2 68.5 58.2 67.2 41.1 41.1 27.4 27.4 n/a 41.6 7.0 2.5 15.5 Net Cash 13.2 6.9 1.77 1.1

FY13F 475.8 73.5 61.6 71.3 43.8 43.8 29.2 29.2 n/a 6.5 6.5 3.0 15.2 Net Cash 14.0 7.3 1.93 1.0

FY14F 501.2 78.3 64.8 75.1 46.2 46.2 30.8 30.8 n/a 5.5 6.2 3.1 14.8 Net Cash 14.8 7.7 2.09 0.9

News Flash | Deleum Bhd | 7 January 2013

DISCLOSURE
Stock rating definitions
Strong buy Buy Neutral Sell Trading buy High conviction buy with expected 12-month total return (including dividends) of 30% or more Expected 12-month total return of 15% or more Expected 12-month total return between -15% and 15% Expected 12-month total return of -15% or less Expected 3-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable

Sector rating definitions

Overweight Neutral Underweight - Industry expected to outperform the market over the next 12 months - Industry expected to perform in-line with the market over the next 12 months - Industry expected to underperform the market over the next 12 months

Commonly used abbreviations

Adex = advertising expenditure bn = billion BV = book value CF = cash flow CAGR = compounded annual growth rate Capex = capital expenditure CY = calendar year Div yld = dividend yield DCF = discounted cash flow DDM = dividend discount model DPS = dividend per share EBIT = earnings before interest & tax EBITDA = EBIT before depreciation and amortisation EPS = earnings per share EV = enterprise value FCF = free cash flow FV = fair value FY = financial year m = million M-o-m = month-on-month NAV = net assets value NM = not meaningful NTA = net tangible assets NR = not rated p.a. = per annum PAT = profit after tax PBT = profit before tax P/B = price / book ratio P/E = price / earnings ratio PEG = P/E ratio to growth ratio q-o-q = quarter-on-quarter RM = Ringgit ROA = return on assets ROE = return on equity TP = target price trn = trillion WACC = weighted average cost of capital y-o-y = year-on-year YTD = year-to-date

News Flash | Deleum Bhd | 7 January 2013

DISCLAIMER
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Bernard Ching Executive Director / Head of Research