Post briefing, management remains upbeat about its outlook especially on rising work orders from its existing businesses as well as potential win from new projects. However, we are still cautious on its operating cost and stretched finances (net gearing of 0.96x as of 3QFY19) upon aggressive expansion. The choice of partner for the new solar projects, in our view, would be a key determinant factor given that Uzma is new in the business. All in, we reduced our FY20/21 earnings estimates by 11%/10% on higher cost base and reiterated SELL rating with lower TP of RM0.63 (from RM0.70 previously), pegged to 9x FY20 P/E.

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

Additional expenses in 3QFY19. To recap, Uzma recorded core losses of RM4.9m in 3QFY19, dragging its 9MFY19 core profit to merely RM2.5m. The poor results were mainly due to several additional one off costs including: (i) RM1.9m audit adjustment for SVP, (ii) RM1.4m additional depreciation adjustment on Uzma Tower, (iii) RM1.9m additional expense due to accounting error, (iv) RM2.5m D18 LD charges and RM1.8m new project start-up cost. Management indicated that overall cost should normalise in 4QFY19.

Tanjung Baram RSC Update. Uzma has written off RM22m rem fee and unapproved capex for Tanjung Baram RSC from its book in 3QFY19 as requested by the new auditor. The field has not been able to perform up to the expectations and has experienced negative cash flow in the last quarter. Despite the fault is not on Uzma, this may delay it’s the capex recoup and the ability to recognise rem fee in the future. We reckon that a termination and request for one-off reimbursement from Petronas would be better to Uzma to alleviate its balance sheet (RM61m borrowings related to Tanjung Baram RSC).

Venturing into renewable energy. Uzma is venturing into renewable energy business via three new bids under the Large Scale Solar Cycle 3 project announced by Energy Commission with three different partners. These projects have capacity ranging from 16MW to 100MW and hence would require capex of RM72m-RM450m assuming RM4.5m/MW. Management guided that power system study (PSS) deadline by TNB is due this month and RFP deadline is due in August-19. Given that Uzma is new in this business, the choice of partner would be a key determinant factor in successfully executing these projects. Furthermore, sizeable capex outlay may also further stretch its balance sheet which is at 0.96x net gearing as of 3QFY19.

Forecast. While keeping our FY19 earnings estimates, we reduced our FY20/21 earnings estimates by 11%/10% as we expect Uzma to incur higher operating cost before new projects that have been tendered can contribute meaningfully.

Keep SELL, lower TP: RM0.63. We reduced our TP to RM0.63 (from RM0.70 previously) pegging to unchanged FY20 PER multiple of 9x post earnings adjustment. Management remains upbeat about its outlook from rising work orders from its existing businesses (CTU, HWU and etc) as well as potential win from new projects. That said, we are still keeping SELL rating on the stock as we are cautious on its operating cost and finances upon expansion.

Source: Hong Leong Investment Bank Research - 4 Jun 2019