Uzma’s 1HFY19 core profit of RM7.4m is deemed within expectations as we expect stronger 2HFY19 on the back of higher work orders. Core earnings fell 50% YoY largely marred by D18 and Uzmapess downtime in 1QFY19 as well as higher tax and finance costs. Tweaked our FY20/21 earnings marginally 2%/1% after imputing stronger JVs & associates contribution offsetting higher finance cost. Maintain HOLD recommendation with higher TP of RM0.87 (from RM0.85) pegged to 8x FY20 PER.

Deemed within expectations. At 27%/25% of HLIB/consensus full year estimates, 1HFY19 core profit of RM7.4m are deemed within expectations as we expect stronger 2HFY19 on the back of higher work orders.

QoQ: On the back of 21% increase in topline, core profit jumped 13.3x to RM6.9m from low base profit of RM0.5m in 1QFY19. This is largely due to higher Uzmapress units operated and higher contribution from D18WIF which experienced exceptionally low efficiency in 1QFY19.

YoY: In tandem with 4% decline in revenue, gross profit decreased by 10% on weakening gross margins at 35.5% (vs 37.6% in 4QFY18). Core earnings further plunged by 40% from RM11.5m in 4QFY18 due to higher operating expenses, finance cost and higher tax expenses.

YTD: Core earnings fell 50% YoY largely marred by D18 and Uzmapess downtime in 1QFY19 as well as higher tax and finance costs.

Outlook. We understand that D18 WIF has returned to its optimal operating rate and is expected to contribute steadily. On the other hand, 3 Uzmapress units also resumed its operations and the remaining 2 will be online in 3QFY19. 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.

Sukuk. Uzma has made its debut issuance of the Sukuk Wakalah amounting to RM247m with its net gearing lifted to 0.8x as of 2QFY19 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. We tweaked our FY20/21 earnings higher marginally by 2%/1% after imputing stronger JVs & associates contribution offsetting higher finance cost.

Maintain HOLD, TP: RM0.87. We increased our TP to RM0.87 (from RM0.85 previously) pegging to unchanged 8x FY20 PER after earnings adjustment. Despite Uzma demonstrating strong QoQ earnings recovery, the stock has rebounded strongly, recording YTD gain of 64%. Therefore, we reckon that most of the positives have been priced in and we maintain our HOLD rating on the stock.

Source: Hong Leong Investment Bank Research - 27 Feb 2019