Highlights

• We left the briefing feeling more neutral as more light is shed on the group’s FY16 business performance. It was a weak year for the group with MECAS (chemical products division) having erosion in gross margins given intense client bargain amid competitive O&G market.

• Management guided for a tough FY17 for MECAS given end product prices will still remain under pressure for most part of the year as per management guidance.

• For Hydraulic Workover Units (HWU), only 2.8 units (out of 9 units) had been utilised in 2016 due to low oilfield activities, resulting in lower profit contribution.

• Looking forward to 2017, rigs utilisation is expected to increase to 6.5 units backed by multiple on-order contracts secured buy the group since back in 4Q16 until now. (from Lundin & other regional NOCs).

• As for Tanjung Baram RSC, while it is still producing oil, it is currently below its optimum level as the group is still currently working out a solution to dispose the associated gas from incremental oil production.

• CAPEX for the group is guided to be RM40m, which will be spent on additional wireline assets and HWU units if more contracts are secured throughout the year. This is broadly in line with our expectations.

• Total group orderbook stands at RM2.6bn, which will be able to be utilised by the group throughout the next 4 years.

• Overall, we anticipate stronger earnings in 2017 (which we have factored in) on the back of higher activities for its Services segment (higher HWU utilisation) and cased hole logging contract. In addition, we expect earnings to be back loaded towards 2H17 with more work orders expected to be issued during the period.

Risks

• Global recession hitting O&G price;

• Technology advancement;

Forecasts

• Unchanged.

Rating

HOLD ↔

• 2017 will be a better year for UZMA but we opine that the improvement is already priced in at current share price level with forward FY17 PER of 12.4x (relatively high as compared to industry average of 10x).

Valuation

• Maintain Hold with TP maintained at RM1.70 pegged to unchanged 12x CY17 PER.

Source: Hong Leong Investment Bank Research - 28 Feb 2017