Period

1Q15

Actual vs. Expectations

Uzma Bhd (UZMA)’s 1Q15 net profit of RM9.6m, accounted for 16.3% and 17.4% of our and consensus full-year estimate, respectively.

However, we deemed it within expectations as we are expecting stronger showing in 2H15 as contributions from its Risk Service Contracts and new contract secured in early this year starts to come in.

Dividends

No dividend was declared as expected.

Key Results Highlights

1Q15 core net profit increased 13.6% YoY on the back of stronger Services revenue (+41.4% YoY) post the inclusion of its new subsidiary acquired last year, MMSVS, providing repair and maintenance of exploratory and production wells utilizing HWUs. On top of that, the acquisition of PEC, focusing on chemical trading segment also contributed to the stronger revenue for its Trading division. Moreover, group’s EBIT margin slipped to 8.8% from 11.7% previously due to different revenue mix from its acquisitions.

1Q15 net profit declined 14.6% YoY, predominantly due to lower services revenue, which is 5.1% weaker QoQ due to lesser work done in the quarter. EBIT margin for Services division also deteriorated to 6.4% from 8.8% in the previous quarter as a result of higher share of lower margin job done. The QoQ weakness in services is, however, partially offset by stronger revenue contributions from the trading division which posted growth of 34.7% QoQ driven by stronger demand for chemical products.

Outlook

Tanjung Baram RSC has achieved its first oil in April this year and a full quarter earnings from this project is expected to be only felt in 3Q15. Profit from this project will be oil price neutral, assuming certain mentioned production targets are met by UZMA.

Maiden full-year revenue contribution from MMSVS, a company providing repair and maintenance services using HWUs, are expected in FY15, lifting its earnings further.

Possibility of cuts in rental rates for its production enhancement assets by Petronas on UZMA’s assets is a concern, but we do not expect it to be significant due to low local competition for the business segment UZMA operates in.

Contract awards may slow in 2015 as oil majors are expected to reassess their options under the current volatile crude oil price environment.

The announcement of RM166.5m contract secured yesterday from Petronas Carigali for helicopter and aviation services is a positive for the company thereby, reaffirming our view of strong YoY improvement in net earnings this year.

Change to Forecasts

We have tweaked our forecast upwards by 3% and 1% for FY15 and FY16, respectively, post housekeeping.

Rating

Upgraded to MARKET PERFORM

Valuation

TP is increased to RM2.34 from RM2.23 previously as we roll forward our valuation to CY16 pegged to PER of 10.0x, which is justified under the current oil price scenario for small cap O & G stocks.

We believe risk-reward profile has improved for the stock post its recent share price weakness; thereby we are advocating investors to buy into the stock in the event of further dips.

Risks to Our Call

(i) Faster than expected recovery in O&G market, and (ii) higherthan- expected margins

Source: Kenanga Research - 26 May 2015