Following the disappointing latest 9M17 results, we slashed CY17-18E earnings by 17%-23% factoring lower work orders from POOS and DWS segments. Meanwhile, with the change of financial year-end to June, we also adjusted the 18-month FY18E earnings to RM45.0m while introducing FY19E estimates. All in, we downgrade the stock to MP with unchanged TP of RM1.65 pegged to 1.0x FY19E PBV.

Below expectations. 9M17 core net profit of RM18.9m came below expectations at 54%/51% 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. On a separate note, UZMA also announced a change in its financial year end from December to June, resulting in 18 month FY18E (inclusive of CY17).

3Q17 core earnings down QoQ and YoY. Despite a 39% increase QoQ in revenue led by all three segments (POOS, DWS and Geoscience and Petroleum Engineering (GPE)), 3Q17 CNP dropped by 32% to RM3.2m after stripping off (i) RM4.0m deferred tax credit, (ii)RM3.7m unrealised forex losses, and (iii) RM2.7m reversal of impairment loss on trade receivables. The poorer performance was due to (i) weakening gross margins by 8.1 ppt to 32.5% marred by poor product and services mix as well as (ii) 31% higher finance cost. YoY, 3Q17 earnings also fell by 63% from RM8.7m in 3Q16 as revenue registered an 18% decrease YoY no thanks to lower drilling project management and consulting job, which was recognised in 3Q16 but cushioned by maiden contribution from D18 WIF project. Following the unexpected weak set of results in 3Q17, UZMA recorded 9M17 core earnings of RM18.9m, declining 2% YoY due to the abovementioned reasons.

Lowered CY17-18E earnings. As a result of disappointing earnings in 9M17, we slashed UZMA’s CY17 and FY18E earnings by 17% and 23% to RM29.2m and RM31.2m, respectively, factoring lower contribution from POOS and DWS segments. Following the change of financial year end to June, the 18-month FY18E earnings will be adjusted to RM45.0m while FY19E CNP of RM33.9m is introduced.

Downgrade to MARKET PERFORM. UZMA is still actively tendering for new jobs amounting to RM2.0b while having a sizeable order-book of RM2.0b in hand. Nevertheless, we believe the challenge at this juncture could be the executions of these work orders as we reckon delays may arise with cautious spending by oil majors. Following earnings cut and roll over of our valuation base year to FY19E, we downgraded the stock to MARKET PERFORM call with unchanged Target Price of RM1.65 pegged to unchanged 1.0x PBV in view of limited upside from current level while awaiting for re-rating catalysts. Such valuation is equivalent to -1.0SD over a 5-year mean. Our TP also implied a FY19E PER of 15.6x which is at its 5-year average mean.

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

Source: Kenanga Research - 30 Nov 2017