Following the disappointing quarter, we expect Uzma to register stronger QoQ results in 2QFY19 with the resumption of D18 WIF and two Uzmapress units. Orderbook remains at >RM1.7bn including estimates of work orders from the umbrella contracts secured. Despite management remaining upbeat about its outlook with robust work orders, we opt to stay relatively conservative by cutting our FY19-21 earnings by 12%/12%10% respectively on lower work orders and higher finance cost following the debut Sukuk issuance. All in, maintain HOLD recommendation with lower TP of RM0.88 (from RM1.10 previously), pegged to 9x P/E on FY20 earnings.

We attended Uzma’s analyst briefing and walked away turning more cautious on its outlook. Key highlights as below:

Stronger 2QFY19. To recap, Uzma recorded core profit of RM0.5m in 1QFY19 (-95% QoQ; -85% YoY) due to unexpected operational downtime (crane and pump related) for D18 WIF which only operated at 40%-50% efficiency during the quarter. Management highlighted that the issues have been resolved and D18 WIF has returned to operating rate of 95% since October. Meanwhile, clients have requested additional DOSH certification on certain equipment which requires four Uzmapress units to be sent onshore for further testing. 2 Uzmapress units also resumed its operations and the remaining two will be online in late 2QFY19 and 3QFY19 respectively. Therefore, we should be expecting stronger QoQ results in 2QFY19.

Orderbook. Management remains upbeat about its outlook with robust work orders from integrated well services (IWS), well plugging and abandonment (P&A), and hydraulic workover units (HWU) businesses. At the same time, there could be some delay in certain new projects. Orderbook remains at >RM1.7bn including estimates of work orders from the umbrella contracts secured. However, tenderbook have dropped significantly from last guided RM5.4bn level with the award of MCM contracts to other services players.

Sukuk. Uzma has made its debut issuance of the Sukuk Wakalah amounting to RM247m with its net gearing lifted to 0.76x as of 1QFY19 from 0.71x as of 6QFY18. Bulk of it is used for refinancing of existing borrowings (D18 WIF related) and the remaining amount will be used for capex and working capital purposes. Management guided that there won’t be further drawdown of Sukuk unless Uzma secures sizeable new projects. Therefore, we expect Uzma to incur higher finance cost going forward.

Forecast. Following the update of 18MFY18 numbers from the latest annual report, we note that 18MFY18 core earnings are adjusted to RM38.4m from RM47.1m. The mainly discrepancy is the recognition of RM10.6m gain on bargain purchase arising from the acquisition of a drilling solution Indonesian company. We opt to be conservative by cutting our FY19-21 earnings by 12%/12%10% respectively on higher finance cost and lower work orders despite bullish guidance from management.

Maintain HOLD, TP: RM0.88. Maintain HOLD recommendation with lower TP of RM0.88 (from RM1.10) pegged to lower FY20 P/E of 9x in view of the potential de rating on the overall O&G sector subsequent to the steep retracement of oil prices from the peak of >USD85/bbl to USD60/bbl level.

Source: Hong Leong Investment Bank Research - 3 Dec 2018