Highlights/ Comments

• We attended Uzma’s 3Q17 results briefing and left feeling neutral on its outlook.

• To recap, Uzma 9M17 core profit plunged 50.9% due to significant increase in operating expenses (+123.4% yoy).

• We understand that the significant increase in operating expenses was mainly due to startup costs incurred for new contracts.

• Furthermore, the D18 water infection facility project faced some operational issues during the quarter which resulted in 11 days of operation downtime and additional costs. We understand that these issues have been rectified and earnings contribution has resumed. Recall that this contract value is worth RM350m to RM400m and the duration is 5 years starting from 31 March 2016.

• We expect minimal earnings contribution from Tanjung Baram RSC (achieved first oil on 15 Aug) in near term due to lower than expected production rate.

• Uzma’s orderbook and tenderbook currently stands at c.RM2bn and c.RM7.3bn respectively. We deem the high tenderbook as a positive sign pointing to resumption of contract flows. Nonetheless, we expect the company to continue facing margin pressures due to cost optimization exercises implemented by oil majors and heightened competitive pressure to grab contracts among industry players. Moreover, a major part of the group’s orderbook is on call-up basis and is subject to actual demand of the client which could remain subdued in the medium term.

Risks

• Slower than expected work orders;

• Project execution risk.

Forecasts

• Unchanged.

Rating

HOLD ↔ , TP: RM1.51

• While 2017 earnings outlook is gloomy, we believe recovery will be in place in 2018 with ramp up in works for services division expected for the contracts secured by the group in 1H17.

Valuation

• Maintain HOLD with TP maintained at RM1.51 pegged to unchanged FY18 PER of 11x.

Source: Hong Leong Investment Bank Research - 6 Dec 2017