Although 1Q19 reported net profit showed positive growth, numbers were lifted by unrealised forex gains. Stripping them off, core earnings actually disappointed, dragged by unusually high overhead costs. Post-results, we slashed FY19-20E earnings by 42-37% on higher costs assumption, while also lowered TP to RM1.30 based on 0.8x PBV. However, OP call still retained on the back of higher brownfield jobs flow.

Below expectations. Despite reported 1Q19 net profit posting gains of 14% YoY/58% QoQ, earnings were actually lifted by unrealised forex gains of RM6.8m. Stripping them off, 1Q19 core net profit came in at only RM0.5m – way below expectations against our FY19 full-year earnings forecast of RM33.9m and consensus RM39.3m. The disparity was due to unusually high administrative and operating expenses. No dividends were announced, as expected.

Severely weak results. YoY, 1Q19 core net profit plunged severely from RM7.3m last year, due to the aforementioned high administrative and operating expenses. On the gross level, profits came in lower by 4% YoY, in tandem with a revenue decline of 12% offsetting slight improvement in gross margins by 3 ppt. QoQ, core net profit also plunged severely from RM11.5m last quarter, similarly due to the aforementioned high administrative and operating expenses. On the gross level, profit was better by 20% QoQ, driven by higher revenue of 6% coupled with margin improvement by 4 ppt.

Suited for greater brownfield jobs. Outlook-wise, operating within the reservoir engineering and oil well intervention space, UZMA is positioned to benefit from higher work-order flow in the local oil and gas brownfields. This stems from the backdrop of: (i) Petronas’ capex prudent approach moving forward to accommodate higher dividend pay-outs, and (ii) gradually stabilising oil prices – both of which would spur increased production in brownfields. Moreover, forward revenue would be underpinned by its sizable order-book of an estimated RM1.8b, with a tender-book of RM7.2b, although successful conversion of order-book to materialised work-orders is paramount.

Maintain OUTPERFORM. Post-results, we slashed our FY19-20E earnings by 42-37%, adjusting for higher costs assumptions. Likewise, following the results disappointment, we lowered our valuations to 0.8x PBV (from 1.0x previously) – in-line with -1S.D. from its 5-year average, arriving to a lowered TP of RM1.30 (from RM1.65 previously). Nonetheless, our OP call is retained, driven by our view of higher works within the brownfield space, while also pending management’s guidance on the unusually high fixed costs suffered this quarter. Risks to our call: (i) lower-than-expected margins, (ii) slower-thanexpected materialisation of order-book into successful work orders, and (iii) slowdown in jobs flow among local oil and gas brownfields.

Source: Kenanga Research - 30 Nov 2018