Without any surprises, UZMA recorded RM7.7m in core earnings in 5Q18 (-33% QoQ , -29% YoY), lifting its 15M18 CNP to RM38.2m. In tandem with weak broad market, UZMA last traded at its 5-year low of RM0.980. We believe this price level offers attractive value and thus our OUTPERFORM call is maintained with an unchanged TP of RM1.65, pegging to 1.0x FY19E PBV on more contract wins that backed by innovative solutions offering and stronger oil prices.

Within expectations. 15M18 core net profit (CNP) of RM38.2m came within expectations at 85%/89% of house/consensus 18-month FY18E earnings. No dividend was declared, as expected.

5Q18 core earnings down both QoQ and YoY. 5Q18 CNP dropped 33% QoQ to RM7.7m, no thanks to seasonally weaker revenue contribution from both Geoscience and Petroleum Engineering (GPE) (- 85%) and Drilling and Well Services segment (DWS) (-17%) coupled with higher finance cost (+15%) and RM0.1m losses in JVs and associates (vs RM2.2m profit in 4Q18; lower CTU services). YoY, 5Q18 earnings also declined by 29% with a 3% fall in revenue, dragged by GPE segment (-58%) overwhelming stronger DWS segment (+3%). The weaker performance was also due to: (i) lowering of gross margins by 1.2 ppt to 43.3% led by poorer product and services mix, (ii) higher taxation (+1.8x), and (iii) losses in JVs and associates (vs barely breakeven profit contribution of RM0.02m; lower CTU services). Cumulative YoY comparables are not available due to the changes in financial year-end. No changes to our FY18-19E earnings. Recall that UZMA has changed its financial year end from December to June, resulting in 18- month FY18 (inclusive of CY17).

Keep OUTPERFORM. UZMA is still actively tendering for new jobs amounting to RM7.0b while having a sizeable order-book of RM1.8b in hand. With the anticipation of oil prices stabilising above USD65/bbl in CY18, we believe this will provide sufficient comfort for Petronas to execute the contracts that have been awarded lately and thus minimising the risk of delay in work orders. Its share price has fallen 23% YTD which warrants attractive valuation of 0.6x FY19E PBV and 9.3x FY19E PER. Thus, we maintain OUTPERFORM call on the stock with unchanged TP of RM1.65 pegged to unchanged FY19E 1.0x PBV premised on its ability to innovate multiple solutions to oil majors amidst a challenging environment. 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) 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 - 31 May 2018