At only 9% of HLIB/consensus full year estimates, 9MFY19 core profit of RM2.5m came below expectations largely due to higher-than-expected operating cost and lower-than-expected work orders. Despite management being bullish on 2HFY19, 9MFY19 core earnings plunged -89% on higher cost, tax expense and finance cost. With that, we slashed our FY19/20/21 earnings by 62%/28%/27%. Downgrade to SELL recommendation with lower TP of RM0.70 (from RM0.98) pegged to 9x FY20 PER.

Below expectations. At only 9% of HLIB/consensus full year estimates, 9MFY19 core profit of RM2.5m came below expectations largely due to higher-than-expected operating cost and lower-than-expected work orders.

QoQ: Uzma slipped into core losses of -RM4.9m in 3QFY19 from core profit of RM6.9m in 2QFY19 after stripping off (i) RM8.3m unrealised forex loss, (ii) RM56.6m re-measurement gain on investment, (iii) RM1.8m PPE disposal loss, and (iv) RM38.7m receivables impairment loss. The weaker performance was largely due to higher operating cost and weaker JVs & associate contribution. This is in spite of revenue increase by 6% on the back of acquisition of Setegap Ventures Petroleum Sdn Bhd (SVP) as of end-Jan this year.

YoY: Although revenue increased by 21% due to consolidation of SVP and higher work orders, gross profit fell -3% due to margin compression. Core earnings fell into the red from RM7.7m profit further dragged by higher operating cost and higher fiancé cost.

YTD: Core earnings fell by -89% YoY to RM2.5m largely marred by higher operating cost, D18 and Uzmapess downtime in 1QFY19 as well as higher tax and finance costs.

Outlook. Despite management being bullish on 2HFY19 on the back of on full consolidation of 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), 3QFY19 results was a disappointment and elevated operating expenses remains a key concern to us.

Sukuk. Uzma has made its debut issuance of the Sukuk Wakalah amounting to RM247m 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. Since then, we have seen its net gearing climbing up from 0.71x as of 6QFY18 to 0.96x as of 3QFY19. This has dampened its 9MFY19 results as the total finance cost surged by 26% YoY. In the previous analyst briefing, management guided that there won’t be further drawdown of Sukuk unless Uzma secures sizeable new projects.

Forecast. We slashed our FY19/20/21 earnings by 62%/28%/27% after imputing lower work orders and higher operating cost.

Downgrade to SELL, lower TP: RM0.70. Post earnings adjustment, we lowered our TP to RM0.70 (from RM0.98 previously) pegging to unchanged 9x FY20 PER. With that, we downgrade the stock to SELL (from Hold previously) in view of earnings uncertainty with escalating operating cost amidst unexciting topline growth. Note that we have factored in strong recovery in 4QFY19 and EBITDA margins to normalise in FY20. There could be further downside to our TP if earnings disappointment sustains into the next quarter.

Source: Hong Leong Investment Bank Research - 30 May 2019