Uzma’s recent analyst briefing threw up no surprises. Earnings in FY23 are set to finish on a stronger note following the better-than-expected core net profit in its 1QFY23 results. To recap, a core net profit of RM13.6m was reported, increasing >100% YoY. Oil and Gas (O&G) outstanding orderbook of RM2bn is decent while replenishment has been encouraging amid the current crude oil price remaining attractive at above USD80/bbl. On the New Energy front, orderbook is relatively healthy though we are cautious on work and billings progression as the current work scope is only limited to portions specified in the Limited Notice to Proceed. Activities are expected to pick-up in 3QFY23 nonetheless, after reaching the financial close. Performance is also expected to be supported by the lower tax provision this year. All said, we revise our FY23-25 earnings projection higher by 53.3%/40%/62.3% respectively on account of stronger work flows as well as improving profit margins. Our call is raised to Outperform with a revised TP of RM0.71 (from RM0.49) based on an unchanged PER of 10x over CY23 EPS.

• 1QFY23 results recap. The Group reported core net profit of RM13.6m, increasing >100% YoY from a core net profit of RM4m in 1QFY22 as gross and net profit margin expanded 2.8 and 7.3 ppts respectively given improved efficiency in absence of restrictive COVID-19 SOPs. QoQ basis was also an improvement though performance was actually helped by lower tax provision for the quarter. This quarter also saw the commencement of a trading segment in commodities, hence higher contribution from the segment by +131.1% YoY, +215% QoQ, which led to higher overall revenue by +20.1% YoY and +5% QoQ, though recognition at bottom line is negligible due to its low profit margin, estimated at around 7% at gross level.

• O&G segment – favorable outlook. Management revealed that sector activities are accelerating as oil majors expedite most upstream-related jobs. Positive outlook from Petronas Activity Outlook (PAO) 2022 – 2024 given its commitment to increase output to capitalise on current oil prices bodes well for the local O&G service companies. The recent contract renewal of Uzma’s D18 Water Injection Facility indicates the need for oilfields maintenance activities to maintain and boost oil production.
  Uzma’s O&G outstanding orderbook of RM2bn is decent while replenishment has been encouraging. Moving forward, the Group foresees securing more decommissioning (plug & abandonment – P&A) jobs given its cost advantage and capabilities in relation to the associated services, i.e., drilling rigs and Hydraulic Workover Unit (HWU), engineering and cutting services, etc. Execution of this P&A job has been lower in the previous years due to COVID-19 restriction while this project is categorised as non-essential work. In absence of COVID-19 SOPs currently, Petronas has put this campaign back in focus. In the PAO, Petronas is targeting 31 wells to be decommissioned in 2022, and this figure is expected to increase to 40 in 2023, and 50 in 2024. We observe that there are quite a number of oil and gas fields in Malaysia and the region needs to perform the decommissioning works as the end of lifespan is approaching. This includes more than ~200 wells that have already been identified.

• New Energy – activity to pick-up in 3Q. On the New Energy front, orderbook is relatively healthy at RM1bn (74% PPA, 26% EPCC). That said, we are cautious on the slower work and billings progression as the current work scope is only limited to the portions specified in the Limited Notice to Proceed. Activities are expected to pick-up in 3QFY23 nonetheless, after reaching the financial close and receiving the Notice to Proceed. That said, we are of the view that segment’s earnings could be tested by material, mobilization, and logistics costs especially at the early stages of construction progress. Our channel checks suggest that gross profit margin for RE EPCC works are typically around 16% - 20%. On its prospect, the Group’s RE segment will supported by the distribution of RE quota of 600 MW via virtual power purchase agreement (VPPA) by the Government which is expected to be awarded in 1H2023. It is understood that each company is allowed to participate in 30 MW.

• Upgrade to Outperform. All said, we revise our FY23-25 earnings projection higher by 53.3%/40%/62.3% respectively on account of stronger work flows as well as improving profits margin. Our call is changed to Outperform with a revised TP of RM0.72 (from RM0.49) based on an unchanged PER of 10x over CY23 EPS.

Source: PublicInvest Research - 6 Dec 2022