UZMA?s 9M16 results are deemed within expectations as we expect stronger 4Q16 underpinned by contributions from D18 WIF project. No changes to our current forecast. In view of the better risk-reward ratio at the current level given that its share price has fallen 28% in the past three months and lower earnings risk as evident by stronger margins in 3Q16, we upgrade our call to MARKET PERFORM with an unchanged TP of RM1.30 peg to CY117 PER of 8.0x.

Deemed within expectations. 9M16 core net profit of RM19.3m after stripping off an unrealised forex gain of RM7.2m is deemed within expectations despite accounting for only 64%/58% of in- house/consensus estimates as we expect a stronger 4Q16 underpinned by contributions from D18 Water Injection Facility (WIF) project. No dividend was declared, as expected.

Strongest quarter YTD. UZMA managed to record 59% QoQ growth in earnings to RM8.7m from RM5.5m in tandem with a 33% increase in revenue thanks to higher contribution from stronger geoscience and petroleum engineering services (GPE) and drilling & well services (DWS). YoY, earnings also strengthened by 71% from RM5.1m in 3Q15 largely attributable to better operating leverage arising from a pick-up in activities evident by 6% YoY improvement in top line.

Despite stronger 3Q16 results, cumulatively, 9M16 core net profit still declined by 36% YoY to RM19.3m, from RM30.1m a year ago, in line with 18% decline in revenue. This is mainly dampened by weaker overall activities, including GPE, DWS and production, optimisation and operation services (POOS) coupled with lower JV and associate income (RM2.6m profit vs. RM5.7m in 9M15).

4Q16 to be buoyed by D18 WIF project. 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. Meanwhile, we expect the D18 WIF project to contribute in 4Q16. Recall that UZMA secured this project with contract value of RM350-400m in July 2015 for duration of 5 years.

No changes to our current FY16-17E earnings forecast. We expect UZMA?s earnings to grow 43% YoY to RM42.7m in FY17 with full contribution from D18 WIF project as well as newly secured coiled tubing unit contract.

Upgrade to MARKET PERFORM. The share price has fallen 28% since we downgraded it to UNDERPERFORM in the last quarter. In view of the better risk-reward ratio at the current level and lower earnings risk evident by stronger margins in 3Q16, we upgrade our call to MARKET PERFORM with an unchanged TP of RM1.30 pegged to CY17 PER of 8.0x. Risks to our call: (i) Weaker-than-expected recovery in O&G market, (ii) Slower-than-expected delivery in D18 Water Injection Project, and (iii) Lower-than-expected margins.

Source: Kenanga Research - 30 Nov 2016