UZMA had a slow start with 1Q16 core net profit of RM5.2m, falling below expectations. New income streams are coming in slower than expected due to project delays and a relatively prudent approach in recognising earnings from Tanjong Baram RSC. Post-earnings adjustment and rolling our valuation base year to CY17, we maintain MARKET PERFORM rating with a higher TP of RM1.88/share.

Below expectations. UZMA booked in 1Q16 core net profit of RM5.2m, after stripping off unrealised forex gain of RM15.8m. This is below expectations at only 9% of in-house/consensus estimates and we reckon the negative deviation is due to lower-than-expected contribution from RSC. No dividend was declared as expected.

Slow quarter. Despite being a seasonally weak quarter, 1Q16 core net profit dropped by 61% YoY to RM5.2m from RM13.1m in the previous corresponding period due to weaker drilling and well services evident from the 20% fall in topline coupled with higher finance cost. Sequentially, 1Q16 core net profit also declined, by 43% QoQ, from RM9.0m in the previous quarter no thanks to lower well and drilling services contribution and weaker associate performance (RM0.4m loss vs. RM1.0m in 4Q15) but cushioned by better Geoscience and Petroleum, Engineering services (GPE).

New income streams coming in slower than expected. FY16 earnings will be fueled by maiden contribution from Tanjong Baram RSC and D18 water injection facility project while the GPE team remaining busy with brownfield studies jobs secured from oil majors. Tanjong Baram RSC’s earnings contribution is expected to be minimal in 1H16 as most cash received from bbls lifted are used to offset opex and recoup capex. Furthermore, the D18 water injection project is behind schedule for 1-2 months due to technical issue and will only contribute to bottomline in 3Q16. All in, we trimmed FY16E earnings by 14% to account for delay in D18 Water Injection Facility project and lower contribution from Tanjung Baram RSC. Meanwhile, we increase FY17E earnings by 2.5% to RM62.1m adjusting for higher joint-venture income driven by potential coiled tubing services.

Reiterate MARKET PERFORM. Post changes in forecast and rolling forward our valuation base year to CY17, our new target price is adjusted higher to RM1.88 from RM1.71 previously, pegged to unchanged PER of 8x. Contract awards may continue to slow down in 2016 as oil majors are still reassessing their cost options while margin erosion pressures are persisting amidst the weak and challenging environment. However, we believe strong recovery in crude prices will speed up the capex recouping process from RSC to deliver decent earnings and thus maintain our MARKET PERFORM call on the stock. Downside risks to our call: (i) Slower-than-expected recovery in O&G market, potential delay in D18 Water Injection Project, and (ii) further rate renegotiation by clients to crimp margins.

Source: Kenanga Research - 26 May 2016