Period

2Q15/1H15

Actual vs. Expectations

UZMA recorded 2Q15 core net profit of RM11.9m, bringing cumulative 1H15 earnings to RM25.1m. This is below our expectation at 41.3% of our full-year estimates but within the consensus at 44.8%. The weaker-thanexpected earnings are due to slower-than-expected oilfield services revenue and margins due to the weak O&G market. Our core net profit excludes RM7.8m of unrealised forex loss.

Dividends

No dividend was declared as expected.

Key Results Highlights

2Q15 core net profit surged 38.2% YoY to RM11.9m from RM8.6m last year due to: (i) the inclusion of services revenue from its newly acquired MMSVS, (ii) strong performance of its Chemical business (MECAS), (iii) improvement in chemical trading PEC, a subsidiary acquired in April 2014, and (iv) an overall stronger performance from its core wire line and UZMAPRE’s assets.

Sequentially, 2Q15 core net profit weakened by 8.9% QoQ from RM13.1m from the previous quarter on the back of weaker trading revenue (-21.1% QoQ) driven by slower sales amid a weak market environment due to cost-cutting measures implemented by clients. Notwithstanding, the group was able to maintain its net margin at 8.5% with increase in contributions from its JCE and associates due to higher work orders by associate companies.

For 1H15, core net profit leapt 46.8% YoY to RM25.1m from RM17.1m last year, reflecting maiden contributions from MMSVS, drilling well services (DWS) business, and PEC, chemical trading business. In addition, its existing core business of Project Oilfield & Operations (POOS) division has also delivered solid growth in the period under review due to higher project billings. Overall, increase in associate and JCE contribution to RM4.7m from RM2.5m previously offset the overall drop in EBIT margin of its core oilfield services margins, rendering group’s EBIT margin relatively flat at 11.6% YoY.

Outlook

Tanjung Baram RSC’s earnings contribution is expected to come in earliest September after the group rectified several technical issues of the field operations. 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.

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

The recently secured RM350-500m Water Injection Facility contract is expected to contribute started 2H16 as the asset required for the contract is currently under conversion, providing earnings cushion during this turbulent era of O&G industry.

Change to Forecasts

For FY15, we have cut our NP forecast by 10.4% to RM54.5m after factoring in lower EBIT margin of 12% compared to 15% previously for its oilfield services division in view of more challenging market in the nearterm.

NP forecast remained relatively unchanged at RM61.2m (from RM61.8m previously) after housekeeping adjustments.

Rating

Upgraded to OUTPERFORM. We believe the risk-reward ratio of the company has improved significantly post its share price plunge in line with resumption of oil price decline. Selling of the stock is deemed overdone given its relatively niche and stable oilfield services business, which are still be needed by its clients to maintain their field conditions and production rates.

Valuation

TP is cut to RM1.85 from RM2.58 previously post a downgrade in target CY16 PER to 8x from 11x previously in view of recent weakness in oil prices and bearish market sentiment. We believe the worst case TP for the stock would be RM1.62 pegged to lower PER of 7.0x if oil prices continue to slide significantly.

Risks to Our Call

(i) Slower than expected recovery in O&G market, and (ii) lower-thanexpected margins

Source: Kenanga Research - 25 Aug 2015