Deleum – spending and still yielding

EVEN during bad times, you can trust Deleum Bhd to be one of the few Bursa Malaysia-listed oil and gas (O&G) companies to pay good dividends.

Over the last five years, it has consistently paid out at least 50% of its profits, giving the stock a healthy dividend yield. In fact, at its current dividend yield of 5.5%, Deleum stands out as the highest yielding oil and gas stock on Bursa.

The company is in a healthy cash position, sitting on a cash pile of RM215.8mil as at Dec 31, 2023.

But its cash position has declined to RM100.8mil (current and non-current) as at Sept 30, 2024, with a significant portion of the cash reallocated to an investment securities fund, reflected as financial assets at fair value through profit or loss.

This means the cash pile has not depleted but has been repositioned for higher yield-generating instruments.

Deleum group CEO Ramanrao Abdullah says the company chairman has challenged him to start putting the cash to work instead of letting it sit in the bank and earn a mere 3% interest.

“We have the biggest challenge – to put cash to work. We are looking at many opportunities, but we have to make sure, we don’t bite off more than we can chew,” he adds.

Sustaining strong dividend yield

While it is reassuring to know that the company will not embark on a spending spree, will the company be able to sustain paying out good dividends now that it is going on a mergers and acquisitions (M&A) mode, which will inevitably eat into its cash pile? Ramanrao remains confident that it will.

He believes they have to balance between the need to expand via M&A and continue to dish out good dividends.

“We balance our expansion plans through M&A whilst maintaining strong dividend payouts by leveraging on our solid financial position, marked by substantial reserves and minimal gearing.

“This enables us to secure low-cost financing for strategic M&A opportunities, where cash reserves are directed toward initiatives that render higher profitability and enhance the group’s earnings.” he tells StarBiz7.

Ramanrao explains that this method ensures that returns from M&A activities not only cover financing costs but also drive additional profitability, supporting its growth objectives and commitment to providing attractive dividends.

“By strategically deploying resources, we can create sustainable value and pursue opportunities that reinforce the group’s long-term performance,” he adds.

In its first significant M&A activity in recent years, Deleum formalised its proposed acquisition of a 70% stake purchase in an Indonesian valve solutions provider recently.

It is buying the 70% stake in PT OSA Industries Indonesia from OSA Industries Pte Ltd for US$7mil. The deal is expected to be completed by the first half of 2025.

The PT OSA stake acquisition would not only allow Deleum to have a stronger foothold in Indonesia, it will boost Deleum’s bottom line significantly as the Indonesian company is giving a profit guarantee of US$2.7mil for FY24 and FY25.

Deleum has registered a huge jump in net profit to RM25.07mil in the third quarter ended Sept 30, 2024 (3Q24), from RM12.21mil a year ago. Revenue rose 11.33% to RM269.22mil from RM241.82mil.

PT OSA recorded a net profit of RM2.7mil for FY23, RM3.04mil for FY22 and RM3.5mil for FY21 with revenue of RM33.55mil, RM28.38mil and RM23.2mil respectively.

In terms of compound annual growth rate (CAGR), Deleum stood out as being one of the strongest among its peers in the energy sector. Its net profit growth from FY20 to FY23 came in at a CAGR of 62.5%.

Two-pronged approach

Ramanrao says Deleum’s growth will come from a two-pronged approach.

One will be organic growth where it plans to further strengthen its existing business by expanding product lines and enhancing the value it provides.

“We will also pursue growth through strategic collaborations, M&A and geographical expansion.

“These acquisitions will be focused on companies that complement our existing portfolio and are in line with our commitment towards innovation and sustainability,” he adds.

It doesn’t stop here. Ultimately, Ramanrao envisions creating a mini version of its global counterparts such as Halliburton, Schlumberger and Baker Hughes.

To do that, he wants to develop new technologies in the O&G industry, with the view of commercialising the technologies.

“Deleum is continually evaluating potential targets and remains open to opportunities across all segments of the O&G value chain – upstream, midstream, and downstream. We firmly believe in leveraging technology to maintain our competitive edge, deliver sustainable returns to shareholders, and foster long-term shareholder value,” he adds.

Recently, Deleum took significant steps in this direction by forming strategic partnerships and making investments in cutting-edge technologies.

It signed a strategic partnership with LatConnect 60 Ltd, an earth observation and data fusion company founded by Malaysians and based in Perth, Australia. Following this partnership, Deleum acquired a 7.7% stake in the company.

In addition, Deleum has also invested in the development of titanium composite tubular technology, tailored for sour gas applications, including carbon capture and storage wells. This niche technology is currently undergoing qualification testing to validate its reliability and performance.

“We recognise that technology and innovation are critical for long-term success. These partnerships and investments represent the beginning of a broader strategy to advance technological capabilities and maintain leadership in the industry, while contributing to a sustainable energy future,” Ramanrao adds.

It is certainly a delicate balancing act for Deleum to continue as a high-yielding stock while spending money on M&A deals.

But if Ramanrao gets it right, the company will be a darling stock in the sector.