Period  3Q14/9M14

Actual vs. Expectations Uzma Bhd (UZMA)’s 3Q14 net profit of RM12.3m brought 9M14 net profit to RM29.3m. This accounted for 62.7% of our FY14 estimate (RM46.8m) and 62.4% that of the consensus (RM46.9m).

 The results are short of expectations on the back of: (i) higher-than-expected administrative costs, likely due to the corporate exercises and office relocation costs and (ii) lower-than-expected MMSVS utilisation and hence contribution in 3Q14.

Dividends  No dividend was declared as expected.

Key Results Highlights QoQ, the 3Q14 net profit was up by 41.8%; mainly due to better EBIT margins from MECAS activities (+0.9pts) and lower-than-expected tax expenses due to tax incentives gained for the MMSVS purchases.

 YoY, core net profit was up 34.4%, again mainly due to better earnings from MECAS, and the lower tax expenses.

 YTD, the lower tax expenses saved the day and resulted in net profit jumping by 8.5%.

Outlook  Catalysts for FY14-15E earnings growth are: (i) earlier-thanexpected income recognition from the RSC project (we only forecasted contribution in FY15), and (ii) higher-thanexpected margins from MMSVS (Thai oilfield services company).

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

 Drilling for its RSC has been pushed back to 1Q15; hence delays in remuneration contribution are expected as well.

Change to Forecasts As the results are below expectations and management has cautioned that near-term prospects could be sluggish as it mirrors the crude oil price decline, we opt to be conservative in our FY14-15E forecasts.

 We cut FY14E by 17.3%, mainly as we scale down the: (i) Uzmapres units to 8 from 10 units, and (ii) revenue growth for trading services (GRE and DWS).

 For FY15, we trim net profit by 16.5%, again as we reduced the Uzmapres units to 10 units from 13 units and streamline other trading services growth.

Rating Downgraded to MARKET PERFORM from OUTPERFORM

Valuation  In our view, the sector has been de-rated in lieu of the crude oil prices; hence we are cutting our PERs across the board. For UZMA, we trim the PER to 12x (from 16x). This is at a premium to other small-mid caps stocks at 10-11x largely as we believe UZMA has transformed from just being an oilfield service provider and moved higher to the Upstream segment with their foray into RSCs.

 Post the change, our TP falls to RM2.70 (from RM4.30); given upside to current share price is <10%; we downgrade the stock to MARKET PERFORM.

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

Source: Kenanga