Despite no surprises in the 4Q16 results, we opt to remain cautious over UZMA?s margins going forward due to stubbornly high fixed cost, leading to an earnings cut of 17% in FY17. On a positive note, UZMA has the potential to benefit from gradual improvement of contract flow from oil majors within the opex space. All in, we keep the MARKET PERFORM call on the stock with higher TP of RM1.81 pegged to 1.1x FY17E PBV following higher BV/share recorded in FY16.

Below expectations. FY16 core net profit of RM28.7m after stripping off several one-off/non-core items such as forex gain, provision of doubtful debt and etc. was within expectations at 95%/106% of in- house/consensus estimates. No dividend was declared, as expected.

4Q16 core profit slid QoQ. UZMA earnings dropped by 8% to RM8.0m QoQ from RM8.7m in 3Q16 largely due to: (i) seasonal weakness arising from monsoon, and (ii) higher tax expense despite the company posting 18% higher revenue QOQ underpinned by maiden contribution from D18 WIF project since November last year. On a YoY basis, UZMA?s earnings also fell 11% from RM9.0m in 4Q15 mainly due to higher finance cost and higher operating cost even though the company recorded higher revenue (+27% YoY) and better gross margins (+3% YoY).

Cumulatively, FY16 core net profit plunged by 28% YoY to RM28.7m, from RM39.6m a year ago, in line with 8% 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 (RM4.4m profit vs. RM6.7m in 9M15).

Slashed earnings. We slashed FY17 earnings by 17% to RM35.7m factoring higher operating expenses. FY18E earnings of RM37.0m (+3.8% YoY) is introduced assuming marginal revenue growth from DWS segment.

Maintain MARKET PERFORM. UZMA had a good start for FY17 by winning two contracts, namely the HWU work from Lundin and Pan Malaysia EWL contracts. Although actual earnings impact is uncertain depending on actual work orders, we believe UZMA?s outlook will gradually recover given that higher crude prices will speed up capex reimbursement of its Tanjong Baram RSC and entice oil majors to roll out more maintenance jobs. All in, we maintain our MARKET PERFORM call with higher TP of RM1.81 pegged to unchanged 1.1x FY17E PBV which is equivalent to -1.0SD over the 5-year mean following higher book value recorded in FY16 largely due to higher OCI.

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 - 27 Feb 2017