UZMA’s 1H16 results were disappointing, dragged by slowerthan- expected drilling and well services contribution and delay in WIF project. Slashed FY16-17E earnings by 38-31% after tweaking down the earnings from Tanjong Baram RSC and its core business. Downgrade to UNDERPERFORM with lower TP of RM1.30 post earnings cut pegged to unchanged CY17 PER of 8.0x.

Below expectations. UZMA booked in 1H16 core net profit of RM10.7m, after stripping off an unrealised forex gain of RM10.9m. This is below expectations at only 22%/23% of in-house/consensus estimates and we reckon the negative deviation is due to delay in water injection facility project and slower-than-expected oilfield services income. No dividend was declared as expected.

Inched up slightly QoQ. UZMA managed to record 5.2% QoQ growth despite a 23% drop in revenue due to lower finance cost and better gross margin (29% in 2Q16 vs. 22% in 1Q16) resulting from higher mixture of higher-margin work. YoY, earnings plunged 54% from RM11.9m in 2Q15, in tandem with 35% fall in top line, no thanks to lower well and drilling services contribution, including drilling project management services and hydraulic workover units arm.

Cumulatively, 1H16 core net profit also declined, by 57% YoY to RM10.7m, from RM25.1m a year ago, dampened by weaker well and drilling services contribution and weaker JV and associate income (RM2.0m profit vs. RM4.7m in 1H15).

Minimal contribution from new income streams. Tanjong Baram RSC’s earnings contribution is expected to be minimal in FY16 as most cash received from bbls lifted are used to offset opex and recouping of capex. Furthermore, the D18 water injection project is behind schedule for 1 month due to technical issue and will only contribute to bottomline in late 3Q16.

All in, we trimmed FY16-17E earnings by 38-31% to account for delay in D18 Water Injection Facility project and lower contribution from Tanjung Baram RSC and well and drilling services.

Downgrade to UNDERPERFORM. Post changes in forecasts, our new target price is adjusted lower to RM1.30 from RM1.88 previously, pegged to an unchanged PER of 8x. Hence, we downgrade UZMA to UNDERPERFORM in view of delay in new earnings stream coupled with prolonged sluggishness in its traditional bread and butter business.

Upside risks to our call: (i) Higher-than-expected recovery in O&G market, (ii) Faster-than-expected delivery in D18 Water Injection Project, and (iii) Better-than-expected margins.

Source: Kenanga Research - 26 Aug 2016