Post the 2Q17 analyst briefing which guided for the 2Q17 results to be profitable at RM4.7m, lifting 1H17 core earnings to RM15.7m, we opt to maintain our FY17-18E earnings, implying growth of 23%-14% in which we factored potential weakness from HWUs. All in, we keep our OUTPERFORM call on the stock with an unchanged TP of RM1.65 as we reckon recent share price weakness is overdone premising on its ability to innovate multiple solutions to oil majors amidst a challenging environment.

2Q17 was profitable at RM4.7m. We understand that 2Q17 core earnings were profitable, at RM4.7m (-57% QoQ, -13% YoY), rather than initial losses of RM1.2m with additional two one-off items, i.e.: RM2.6m additional deferred tax charge and RM3.3m additional provision. Thus, cumulative 1H17 core earnings of RM15.7m (+47% YoY) were within management’s expectation, anticipating stronger 2H17 backed by: (i) unbilled RM35m-38m work performed for Kinabalu project in 2Q17, (ii) stronger associate earnings due to pick-up in CTU jobs, and (iii) higher work orders from contracts secured.

Prioritising high margined jobs. Apart from the unbilled work for Kinabalu jobs, the management explained that the 21% decline in 1H17 topline was caused by lower execution of manpower jobs, which typically fetches lower PAT margins of 2-3%, resulting in PAT margin improvement to 9.5% in 1H17 from 5.1% in 1H16. Note that these jobs contributed <10% of total revenue in 1H17 vs 35%-40% of FY16 revenue.

Utilisation to stay flattish for MMSVS. In view of slower-thanexpected work orders, the HWU’s utilisation is likely to stay flattish or at best improve slightly than last year’s 30+% level. Having said that, MMSVS is anticipated to break even or register a small profit this year to help by cost optimization, improving from RM6m losses in FY16 (vs RM1m losses in 1H17).

Robust tender book at RM2.0b. Moving forward, management is excited about UZMA’s tender-book given the exciting on-going RM2.0b bids, including experimental supply and installation of non-metallic pipes (NMP), installation of electrical submersible pipes (ESP), reinforced thermal pipes (RTP) jobs and water injection projects (capex size smaller than D18 project).

Stay conservative with our FY17-18 estimates. Despite core earnings for 1H17 being adjusted to RM15.7m from RM9.8m following the additional adjustments made on one-off items, we decided to maintain our FY17E and FY18E earnings forecasts at RM35.3m and RM40.3m, implying YoY growth of 23% and 14%, respectively, given that HWU operations may not pick up as strong as initially expected.

Keep OUTPERFORM. We believe the recent share price weakness to YTD low of RM1.30 level (YTD -24%) is overdone and thus, we believe the current level is an attractive entry level given undemanding valuation of 0.8x FY18E PBV and 10.3x FY18 PER. Thus, we maintain our OUTPERFORM call on UZMA with unchanged TP of RM1.65/share pegged to 1.0x FY18E PBV premising on its ability to innovate multiple solutions to oil majors amidst challenging environment. 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 Aug 2017