We returned from UZMA’s briefing feeling neutral, having gathered that 1Q19’s disappointing results were due to operational interruptions in D18 and Uzmapress, leading to a negative bottom-line impact of RM12-13m in 1Q19. However, the issues are currently being sorted out, while the order-book remains firm at RM1.8b. Hence, postbriefing, we raised FY18-19E earnings by 37-29%, with maintained OP call and TP of RM1.30, pegged to 0.8x PBV.

1Q19 plagued by operational hiccups. To recap, UZMA posted a set of disappointing 1Q19 results, registering only RM0.5m core net profit, due to unusually high costs during the quarter. We gathered that this was due to operational interruptions during the quarter, particularly (i) D18, which suffered equipment problems, operating at only 40-50% efficiency, while (ii) 4 out of 6 Uzmapress units temporarily ceased operations due to compliance for Department of Occupational Safety and Health (DOSH) certification. Combined, these two factors attributed to a negative bottom-line impact of RM12-13m in 1Q19. Moving forward, management assured that: (i) D18 has resumed normal operations at 95% efficiency in October and November, and (ii) 2 Uzmapress units are currently back in operations with another 2 set to return in late 2Q19/early 3Q19.

Upbeat about jobs flow. Management remains upbeat on future jobs flow moving forward, especially within the production solution space, driven by expected increases of work-orders from existing contracts, coupled with pick-up in new contract awards. This is underpinned by c.420 job tenders the company currently has at hand, summing to a tender-book value of RM5.4b, with some potential near-wins including: (i) a water injection project similar to D18, albeit at a smaller contract value, and (ii) a plug-and-abandonment project. However, we note that this latest tender-book value is lower than previously at RM7.2b 1-2 quarters ago, as UZMA had lost out on all of its MCM bids, although management guided that this was within their expectations given their lack of expertise in the area. Meanwhile, order-book still stands firm at RM1.8b (flat compared to previous quarters), with around c.RM1.4b from firm-order contracts while the remaining are from umbrella-based contracts.

Move towards higher margins. Additionally, management has also highlighted UZMA’s gradual move away from lower margin works in favour of higher margin jobs over the past several quarters. The company’s gross margins currently stand well over >30%, as compared to 20-30% in FY16, with most of it contributed by production solutions services. All-in, we expect similar trends moving forward.

Maintain OUTPERFORM. Overall, we returned from the analysts’ briefing last week feeling neutral, being comforted that its operational hiccups are currently being sorted out. Post-briefing, we opted to revise our FY19-20E earnings upwards by 37-29%, seeing that the high costs incurred in 1Q19 are non-recurring.

We kept our TP unchanged at RM1.30, pegged to 0.8x PBV – in-line with -1.S.D. from its 5-year average. Our call is backed by our view of higher works flow within the local brownfield space, in which UZMA is positioned to benefit from, with the stock also currently trading near all- time low valuations at 0.5x PBV and 10x PER, despite its improved outlook compared to few years back amidst the oil price plunge.

Risks to our call: (i) lower-than-expected margins, (ii) slower-than- expected materialisation of order-book into successful work orders, and (iii) slowdown in jobs flow among local oil and gas brownfields.

Source: Kenanga Research - 03 Dec 2018