Highlights/ Comments

• We attended the analyst briefing on Uzma 2Q17 results, walking away feeling neutral.

• The key reason behind the weak 2Q17 results was the absence of revenue recognition of its Kinabalu contract (a novation contract awarded by Petronas to the group due to faulty work done by the previous contractor). The non-recognition of revenue was due to delay caused by faulty valve on site.

• The contract is worth RM150m whereby 50% of it has been recognized in 2016, while the remaining RM75m will be recognized in 3Q17 and 4Q17. This will therefore help boost Uzma’s group core earnings in 2H17.

• Its Hydraulic Workover Units (HWU) division has seen its operating losses narrowed to RM1m in 1H17 from -RM6m in 1H16 due to better utilization. We expect the division to breakeven in 2H17 as more units will be utilized as work orders will be ramped up for its HWU contracts (secured in 1H17) with Lundin and Murphy.

• The company has also gained traction with more business developments on the JV formed with Aerosun Corporation for EPCC of non-metallic pipes for onshore applications. It is a fairly unconventional concept in Malaysia and the JV has recently collaborated with Petronas on a contract for proof of concept worth RM42m. This may be commissioned in 4Q17 and will help to lift the group’s earnings slightly.

Risks

• Slower than expected work orders;

• Project execution risk.

Forecasts

• Unchanged.

Rating

• BUY

• While earnings were disappointing in 2Q17, we believe 2H17 will turn around to be stronger as more of its contracts are ramped up.

• Recent share price plunge has made the stock’s valuation more attractive than before. Upgrade to BUY .

Valuation

• TP is maintained at RM1.51 pegged to unchanged FY18 11x PER.

Source: Hong Leong Investment Bank Research - 30 Aug 2017