Period  1Q14

Actual vs. Expectations Uzma Bhd (UZMA)’s 1Q14 net profit of RM8.4m accounted for 18.8% of our full-year FY14 estimate (RM44.9m) and 18.4% of the consensus (RM45.7m).

 We deem the results to be within our expectations as the 1Q is seasonally weaker for UZMA. Furthermore, administrative expenses were higher in the quarter as Uzma spent ahead on new staff hires to pursue upcoming projects across divisions (including the RSC contract which was awarded in Apr-14). We look forward to such projects catching up and contributions from 2Q14 onwards.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, the 1Q14 net profit was up by 28.2% despite lower revenue (-15.3% on account of lower drilling activities in 1Q) namely due to (i) better margins (+13.3pts) in the trading division improved on more MECAS activities; and (ii) better Setegap Ventures activities that led to a significant growth in JCE earnings (+>100%).

 YoY, 1Q14 net profit was down marginally by 4.8% mainly due to higher administration and operating expenses resulting in slimmer margins as UZMA spends ahead for upcoming projects across the board (including the RSC project it won in Apr). The company has is also spending for its new HQ, which contributed to increases in admin costs as well.

Outlook  Further catalysts for FY14-15E earnings growth are: (i) earlierthan-expected income recognition from the RSC project (we only forecasted a contribution in FY15), and (ii) success in acquiring the Thai oilfield services company which would lead to a new income stream. According to UZMA, the Thai acquisition comes with revenue guarantee of USD18.2m (RM59.2m) and USD22.6m (RM73.5m) for FY14 and FY15, respectively.

 Uzma’s order book stands at RM1.8b whilst bids are at RM2.6b.

 Further game-changers are the successful participation in any of the Chemical Enhanced Oil Recovery (CEOR) projects.

Change to Forecasts    As we deem the earnings to be within expectations, we maintain our FY14-15 forecasts.

Rating Maintain OUTPERFORM

Valuation  We maintain our TP of RM7.30, which is based on an unchanged targeted FY15 PER of 16x.

 Our PER is justifiable given that the stock has successfully moved up the value chain instead of just being a service provider; and as the share base is quite illiquid, appreciation can be significant.

 Ex-rights, in a maximum scenario, our TP would be RM3.78, versus ex-rights share price of RM3.58.

Risks to Our Call (i) Lower-than-expected margins and O&G activities; and (ii) delay in first-oil of the RSC.

Source: Kenanga