We attended Uzma’s analyst briefing and walked away reaffirming its improving outlook backed by its (i) firm orderbook of RM1.4bn, (ii) potential work orders from umbrella contracts and (iii) RM5.4bn bid book. Gross margin improvement is expected to moderate and sustain at 38% level following the gradual exit of low margined businesses since 2014. Despite bullish guidance from management, we maintain our earnings forecast on the relatively conservative side with potential holdback in the oil major’s spending in tandem with the capex cut. All in, maintain forecast and HOLD recommendation with unchanged TP of RM1.21, pegged to FY19 10x P/E.

We attended Uzma’s analyst briefing and walked away reaffirming its improving outlook. Key highlights as below:

Tanjung Baram RSC. To recap, Uzma incurred RM17.5m impairment on receivables. We understand that such impairment is made on a more prudent recognition on its rem fees entitlement according to the production calculation of the operator of Tanjung Baram instead of the original contract of the RSC. Uzma has stopped recognising rem fees from the project since 2015 and is still at a capex and opex recovery stage with more than half of the capex incurred being recovered to date.

Stronger 2HCY18. Uzma is targeting a stronger 2HCY18 as compared to 1HCY18 on the back of (i) higher work orders received for the well abandonment integrated services for Pulai-A, (ii) CTU contribution via its associate, (iii) wireline and (iv) HWU businesses.

Orderbook. Management remains upbeat about its outlook with increasing tenders and project enquiries. Currently, Uzma’s firm orderbook stands at RM1.4bn, spanning over the next few years. The company is also aiming to grab additional RM600m work orders from the several umbrella contracts secured assuming 30% win rate on the RM2.0bn estimated total work orders available. With the assumption of several new wins from its bid book of RM5.4bn, Uzma is eyeing to hit revenue of RM600m RM900m in the next three years.

Margins. Uzma has almost completed its business portfolio reshuffling by gradually exiting its lower margin business such as manpower consultancy business. Currently, these businesses contributed minimally in 1H18 as compared to 41% of the total revenue in 2014. As a result, its gross margin has also improved to 38% from 23% in 2014. Going forward, management is expecting margins to sustain at current level despite recognising the inflationary pressure in overall cost.

Forecast. We opt to maintain our earnings forecast on the relatively conservative side despite bullish guidance from management as we believe there could be some hold back in the oil major’s spending in tandem with the capex cut.

Maintain HOLD, TP: RM1.21. Maintain HOLD recommendation with unchanged TP of RM1.21 pegged to unchanged FY19 PER of 10x.

Source: Hong Leong Investment Bank Research - 4 Sept 2018