Following the unexpected loss-making quarter narrowing UZMA’s 1H17 core earnings to RM9.8m, we slash FY17-18E earnings by 20%-19% factoring lower work orders from POOS and DWS segments. Having said that, we maintain OUTPERFORM on the stock with lower TP of RM1.65/share pegged to 1.0x FY18E PBV given that share price has fallen c.29% from YTD high suggesting negatives could have priced in and we expect earnings to pick up in 2H17.

Below expectations. 1H17 core net profit of RM9.8m after stripping off one-off gain of RM15m arising of liability write-back from the Indonesian directional drilling company, unrealised forex losses of RM5.4m and provision of doubtful debt of RM8.3m came below expectations at 22% of house/consensus full-year estimates. The disappointing results were largely due to lower-than-expected contribution from the Production Optimisation and Operations Services (POOS) and Drilling and Well Services segment (DWS). No dividend was declared, as expected.

2Q17 slipped into the red. In tandem with 24% drop in revenue, 2Q17 slipped into losses of RM1.2m from a profit of RM11.0m in 1Q17 due to lower contribution from POOS segment as a result of delay in one of the key projects. We are guided that the project is expected to pick up in 2H17 with higher revenue contribution. YoY, UZMA also fell into the red from net earnings of RM5.5 in 2Q16 as revenue also registered a 22% decrease YoY no thanks to lower drilling project management and consulting job, which was recognised in 2Q16 but was cushioned by maiden contribution from D18 WIF project. Following unexpected losses in 2Q17, its 1H17 core earnings were narrowed to RM9.8m, recording an 8% fall in core earnings YoY due to the abovementioned reasons.

Slashed FY17-18E earnings. Following disappointing earnings in 1H17, we downgrade UZMA’s FY17-18E earnings by 20% and 19% to RM35.3m and RM40.3m, respectively, factoring lower contribution from POOS and DWS segments.

Maintain OUTPERFORM. Following our earnings cut, we lowered our TP to RM1.65 from RM2.05 pegged to lower 1.0x FY18E PBV (from 1.2x previously) which is equivalent to -1.0SD over a 5-year mean in view of delay in work orders as a result of cautious spending by oil majors. Having said that, share prices have fallen c.29% from YTD high of RM1.97 in April to RM1.40, suggesting that negatives could have been priced in. UZMA is still actively tendering new jobs amounting to RM2.0b while having a sizeable order book of RM2.0b in hand spanning the next few years. All in, we maintain OUTPERFORM call on the stock as we expect earnings to pick up in 2H17. Our TP also implied a FY18E PER of 11.5x which is in line with its 5-year average mean. 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 - 25 Aug 2017