Deleum’s transformation story

AFTER several years of internal reset and operational recalibration, Deleum Bhd is attempting to shift how the market values it, from a cyclical oilfield proxy to a structurally more resilient, maintenance-led services platform.

Deleum group chief executive officer (CEO) Ramanrao Abdullah’s argument is straightforward: the company today is fundamentally different from the one investors once priced on peak-cycle expectations and governance overhang.

“Deleum was previously positioned as a value company recognised for stability, consistent dividends and steady returns. Today, the group has evolved into a more growth-oriented organisation while continuing to uphold its commitment to sustainable dividend payments,” he tells StarBiz 7.

But the latest results show why scepticism lingers. Its financial year 2025 (FY25) revenue rose a solid 9.9% year-on-year to RM997.1mil, driven by stronger activity across power and machinery (P&M) and oilfield integrated services (OIS).

However, operating profit inched up just 0.4% to RM130.3mil as higher operating expenses, foreign-exchange losses and fair value adjustments on forward contracts compressed margins.

Normalised profit after tax and minority interests or Patami slipped 6.9% to RM70.6mil.

Revenue growth is visible; margin expansion is not. And it is precisely in this gap – between cyclical optics and structural repositioning – where Deleum’s transformation story now sits.

When Ramanrao took over the helm in 2021, Deleum was emerging from a reputational setback linked to corruption concerns.

The immediate priority was to restore trust across customers, regulators and employees.

Governance frameworks were strengthened, procurement controls tightened and approval workflows clarified through the implementation of a structured management system designed to ensure consistent, auditable decision-making regardless of personnel changes.

Decision-making authority was distributed more widely, moving the organisation away from a CEO-centric model toward one anchored in systems, structure and accountability.

This structural shift is not cosmetic. It underpins the group’s claim that downside risk and operational volatility have been reduced meaningfully over recent years.

Every tender now undergoes cross-functional challenges involving operations, finance and commercial teams.

Sustainable pricing ranges are modelled; cost structures are stress-tested; margins are forecast with greater precision.

This discipline is critical in light of FY25’s margin compression. Gross profit rose 12% to RM263.8mil, but the profit before tax margin narrowed to 13.4% from 15% previously.

Ramanrao argues that stronger bidding frameworks and tighter scrutiny should prevent revenue growth from coming at the expense of returns over time.

Internally, a pay-for-performance culture has taken root. Business unit heads are accountable for profit and loss, working capital and delivery quality.

Perhaps, the most under-appreciated feature of Deleum’s earnings profile is its operating expenditure (opex)-heavy composition.

Ramanrao points out that about 90% of revenue is operations and maintenance (O&M) or aftermarket-oriented, providing a recurring base less exposed to swings in upstream capital expenditure.

This structural ballast is evident in segment performance. P&M revenue rose 6.3% to RM762mil in FY25, supported by exchange engines, retrofit projects and turbine parts.

OIS revenue climbed 23.4% to RM234.2mil on stronger maintenance, construction and modification (MCM) execution, specialty chemicals and slickline activity.

That said, execution risks remain.

Analysts have flagged delays in MCM work orders despite a sizeable contract base.

Ramanrao attributes pacing issues largely to client schedules, vessel availability and accommodation constraints, rather than structural weakness.

To mitigate this, earlier work surveys, digital scheduling tools and tighter project controls have been implemented to reduce bottlenecks.

Crucially, newer MCM contracts carry unit rates 30% to 40% higher than earlier cycles. Combined with better planning and manpower optimisation, profitability is described as less volume-sensitive than before.

While quarterly earnings may still fluctuate, the baseline has strengthened.

The P&M segment remains the group’s core profit contributor. After several strong years, earnings growth has plateaued, prompting questions about the next leg of expansion.

Diversification and regionalisation

Ramanrao’s answer lies in diversification and regionalisation.

“While upstream oil and gas remains a core anchor of the business, the group is actively diversifying beyond the upstream segment to build a more balanced and resilient portfolio.

“This includes pursuing onshore power generation, exploring selected downstream opportunities through new principals and strategic partnerships that complement its existing capabilities.

“Alongside these adjacencies, Deleum is actively looking at acquisition opportunities and other growth options to expand regionally,” he says.

These initiatives, he adds, aim to reduce concentration risk while expanding addressable markets.

Emerging opportunities such as solar turbines and servicing data centres represent longer-term optionality.

However, Ramanrao is pragmatic: customer readiness, regulatory liberalisation of gas markets and infrastructure availability must align before these segments become material earnings contributors.

In the interim, renewed turbomachinery contracts – recurring maintenance and overhaul work – provide clearer visibility over the next two years.

The acquisition of a 70% stake in PT OSA Industries Indonesia marks Deleum’s most significant merger and acquisition (M&A) move in years.

With a profit guarantee covering FY24 to FY25, near-term earnings are partially insulated during integration.

PT OSA adds installed base and recurring aftermarket potential, deepening regional presence.

Strategic projects are underway to sharpen commercial focus, enhance deal conversion and scale PT OSA more effectively within the Indonesian market.

Sales execution has been upgraded with digital prospecting tools and structured account planning to improve deal conversion.

“With these levers, which include operational uplift, market expansion and stronger commercial execution, the acquisition is positioned to enhance returns sustainably without margin dilution,” Ramanrao says.

Dividend discipline

Despite margin pressures, the balance sheet remains robust.

According to MBSB Research, cash and bank balances are projected at RM222mil in FY25, rising further in following years, while debt-to-equity hovers around 0.4 to 0.5 times.

Dividend per share is forecast at 6.2 sen for FY25, implying a yield of about 3.1%.

Dividend sustainability, management stresses, remains a core financial principle.

Growth investments – whether in Indonesia, new capabilities or systems – are being balanced against maintaining payout stability and preserving financial flexibility.

“With a stronger operational foundation, we are confident in our capacity to continue delivering sustainable payouts while pursuing growth opportunities responsibly,” Ramanrao explains.

Analysts have trimmed earnings forecasts for FY25 to FY27 amid softer sector sentiment and near-term volatility.

That caution is understandable. Oil and gas remains cyclical, and margin recovery is not instantaneous.

“While analysts remain cautious, given current sector sentiment and near-term volatility in oil and gas markets, Deleum is confident that investors will recognise the company’s underlying value over time.

“The group continues to prioritise operational discipline, balance sheet strength and capability building to ensure resilience through the cycle.

“As customer spending normalises and market conditions stabilise, Deleum is well positioned for recovery. Improved demand visibility, combined with a predominantly opex-driven business model, is expected to translate into stronger earnings over the medium term,” Ramanrao explains.

At 9.5 times FY25 earnings with an unchanged RM1.92 target price and “buy” recommendation from MBSB Research, the stock is not priced for aggressive growth.

It is valued closer to a cyclical contractor than a defensive services platform with recurring cash flows.

But if Deleum has indeed transitioned from a peak-cycle earnings story to a through-cycle resilience story, then valuation may eventually follow fundamentals.

For now, the numbers show a company still defending margins while building structural strength.

The transformation is neither cosmetic nor complete, but it is measurable. And in a sector where volatility often obscures durability, resilience may yet prove to be the more powerful growth catalyst.