Post briefing, we walked away turning more optimistic over its medium term outlook especially on the well abandonment space but remained cautious on its operating cost and finances upon expansion. Orderbook stood at RM1.1bn- 1.2bn including estimates of work orders from the umbrella contracts secured. Meanwhile, core tenders increased to RM3bn (75% are local bids) with newly submitted bid related to water injection facilities (WIF) project. All in, we kept our estimates unchanged but maintained HOLD recommendation with higher TP of RM0.98 (from RM0.87 previously), pegged to 9x P/E on FY20 earnings.

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

Stronger 2HFY19. To recap, Uzma recorded core profit of RM6.9m in 2QFY19 (+13.3x QoQ; -40% YoY). The QoQ improvement was largely due to recovery of D18 WIF which operated at 100% uptime, higher Uzmapress units operated and stronger contribution from well services revenue led by Pulai A well abandonment project. We expect stronger QoQ improvement in the next two quarters. This is premised on full consolidation of Setegap Ventures Petroleum Sdn Bhd (SVP) after increasing its stake to 64% from 49%, higher billings from well plugging and abandonment (P&A), and improving utilisation of hydraulic workover units (HWU). Work orders are likely to peak in 4QFY19 given that 3QFY19 will still be affected by bad weather condition arising from monsoon season.

Orderbook. Orderbook stood at RM1.1bn-1.2bn including RM200m-300m estimates of work orders from the umbrella contracts secured. Management has seen slight pick up in work orders from umbrella contracts secured in the past 6 months. Meanwhile, core tenders increased to RM3bn (75% are local bids) with newly submitted bids related to water injection facilities (WIF) project.

Outlook. 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. Uzma is poised to benefit from rising well abandonment work demand whereby Petronas has earmarked 50/40/60 wells in CY19/20/21. However, we gather that all these jobs may take longer time depending on its complexity. On the other hand, its HWU business was in the red with RM2.5m losses in 2QFY19. Management is targeting to breakeven by this quarter and to reach optimal utilisation (75%-85%) by 4QFY19.

Forecast. We maintained our earnings forecast as we have imputed 24%/8% earnings growth in FY20/21. Note that FY19 earnings growth is incomparable due to 18MFY18 subsequent to change in financial year end.

Maintain HOLD, TP: RM0.98. We increased our TP to RM0.98 (from RM0.87 previously) pegging to higher FY20 PER multiple of 9x (from 8x). This is in view of higher optimism over its medium term outlook especially on the well abandonment space. That said, we are still keeping HOLD rating on the stock as we are cautious on its operating cost and finances upon expansion.

Source: Hong Leong Investment Bank Research - 6 Mar 2019