Uzma’s 1QFY19 core profit of RM0.5m came significantly below HLIB/consensus expectations at only 1% of FY19 earnings forecasts. The
negative deviation was due to unexpected downtime of D18 water injection facility (WIF) and lower contribution from Uzmapress. Current order book stood at RM1.8bn including estimate of work orders received from the umbrella contracts secured thus far. Following that, we decreased FY19-21 earnings forecast by 27%/23%/20% respectively after imputing lower contribution from D18 WIF and Uzmapress contribution as well as higher operating expenses. Maintain HOLD recommendation with lower TP of RM1.10 (from RM1.21) pegged to 10x FY20 PER.

Results below expectations. 1QFY19 core profit of RM0.5m came significantly below HLIB/consensus expectations at only 1% of FY19 earnings forecasts. The negative deviation was due to unexpected downtime of D18 water injection facility (WIF) and lower contribution from Uzmapress.

QoQ: Despite 6% increase in topline, core profit dropped by 95% to RM0.5m after stripping off (i) RM6.8m net forex gain. The weaker performance was mainly due to unexpected equipment issue for D18 WIF which only operated at 40%-50% efficiency during the quarter. Meanwhile, it was further marred by interruptions of 4 Uzmapress units as a consequence of client policy, requiring Uzma to obtain DOSH certification on certain equipment. This was partially cushioned by stronger JV & associate contribution (+94%) and lower finance cost (-32%).

YoY: Core profit also plunged by 85% from RM3.2m no thanks to the abovementioned reasons masking lower finance cost (-13%).

Outlook. We understand that D18 WIF has returned to its optimal operating rate of 95% since October. On the other hand, 2 Uzmapress units also resumed its operations and the remaining two will be online in late 2QFY19 and 3QFY19 respectively. The current order book of the group stands at c.RM1.8bn including estimate of work orders received from the umbrella contracts secured thus far. Going forward, the company is focusing more on bidding for high margin jobs. However, part of the group’s order book is on call up basis and the group’s recovery hinges on the actual demand of clients.

Forecast. Following the disappointing results, we decreased FY19-21 earnings forecast by 27%/23%/20% respectively after imputing lower contribution from D18 WIF and Uzmapress contribution as well as higher operating expenses.

Maintain HOLD, TP: RM1.10. We maintain HOLD recommendation with lower TP of RM1.10 (from RM1.21) after earnings adjustment and rolling forward our valuation base year from FY19 to FY20 with unchanged PER multiple of 10x.

Source: Hong Leong Investment Bank Research - 30 Nov 2018