2Q19 results recovered well sequentially, which broadly matched expectations, as previous operational disruptions from D18 and Uzmapress have been partially resolved. Moving forward, we expect gradual earnings recovery for the coming quarters on the back of continued recovery in Uzmapress coupled with consolidation of Setegap Ventures. Maintain MP with a higher TP of RM0.97.

Deemed broadly within expectations. 1H19 core net profit of RM7.4m (arrived after stripping-off unrealised forex and gains on disposals) came in at only 28% of our and 23% of consensus full-year forecasts. However, we deem this to be within expectation, in anticipation of a stronger 2H19 given the absence of any meaningful earnings in 1Q19. To recap, 1Q19 posted core net profit of only RM0.5m, dragged by (i) operational disruption to D18 water injection facility, while (ii) 4 out of 6 Uzmapress units (production enhancement equipment) ceased operations due to compliance for Department of Occupational Safety and Health (DOSH) certification. As we understand, (i) D18 has currently resumed to 100% operational status in 2Q19, while (i) 2 Uzmapress units have resumed operations, with another 2 set to return in early-3Q19. Meanwhile, no dividends were announced, as expected.

Sequentially recovered earnings. 2Q19 staged a massive jump QoQ in core earnings to RM6.9m (from RM0.5m in 1Q19), on the back of the aforementioned operational recovery of D18 and Uzmapress. However, YoY, core earnings were weaker (-40%), dragged by: (i) lower revenue (-4%) on top of deteriorated gross margins (by 2.1 ppt) due to lower asset utilisations, (ii) higher finance costs (by 58%) given increased borrowings drawdown for working capital purposes, and (iii) tax expense in 2Q19, as opposed to positive tax impact last year due to tax incentives from the Malaysian Investment Development Authority (MIDA). Cumulatively, 1H19 core earnings deteriorated 61% YoY due to the aforementioned absence of any meaningful profits in 1Q19.

Gradual earnings recovery in coming quarters. We believe earnings should post some gradual recovery in the coming quarters, backed by the aforementioned operational resumption of Uzmapress units, and coupled with its increased stake in Setegap Ventures to 64% following an additional 15% stake acquisition. The acquisition is expected to contribute another RM1-3m towards UZMA’s FY19-20E earnings (representing roughly 4-10%), with the acquisition expected to be completed by end-3Q18 (refer to our report dated 30 Jan 2019 for more details regarding the acquisition). 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.

Maintain MARKET PERFORM. Post-results, we made no changes to our FY19-20E numbers. Given the slightly increased earnings visibility for the coming quarters, we decided to bump up our valuations by a notch to 0.6x PBV (from “floor” of 0.5x PBV previously) at roughly -1SD below its mean, resulting in a higher TP of RM0.97 (from RM0.81 previously). Our TP also implies forward PER of 12x, which is near -0.5 SD below its mean PER.

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 - 27 Feb 2019