3Q19 results came in drastically below expectations as it plunged into losses, dragged by unusually high operating costs. While we view UZMA as a conceptual beneficiary of increased brownfield activities locally, continued earnings under-delivery have prompted us to re-evaluate our stance. Hence, we downgrade its rating to UP with a lowered TP of RM0.69.

Drastically below expectations. 9M19 results came in drastically below expectations, recording core net profit of RM2.5m, making up merely 9% of our and consensus full-year estimate, as 3Q19 plunged into core loss of RM4.9m (after stripping-off non-core items such as impairments, unrealised forex, and re-measurement gains) due to unusually high operating costs, suspected to be caused by high project development costs coupled with accounting adjustments from under-recognition of costs in the prior quarters. No dividends were declared, as expected.

3Q19 plunged into losses. As mentioned earlier, 3Q19 plunged into core losses of RM4.9m (versus core profit of RM6.9m in 2Q19, and RM7.7m last year), dragged by the unusually high operating costs. Nonetheless, revenue managed to post some growth (+21% YoY, +6% QoQ) following the consolidation of Setegap Ventures Petroleum as the acquisition to up its stake to 64% was completed in Jan 2019.

Repeated earnings under-delivery. Although we believe UZMA conceptually should benefit from the increase in local brownfield activities by Petronas, the company has, nonetheless, repeatedly under-delivered in terms of earnings. To recap, earlier in 1Q19, the company only managed to post core earnings of merely RM0.5m, dragged by operational issues faced in its D18 water injection facility and Uzmapress production enhancement equipment units. While the company managed to stage a recovery in the subsequent quarter, we believe the unusually high operating costs recorded this quarter, plunging the quarter into losses, has once again thrown forward earnings’ expectations into disarray. As such, post-results, we slashed our FY19E/FY20E earnings by 73%/30%. On a more positive note, the company’s order-book still remains strong at around ~RM1.2b, providing revenue visibility for the next ~3 years, with potential upsides from tender-book of ~RM3b consisting mostly of local job bids.

Downgrade to UNDERPERFORM (from MARKET PERFORM previously) given its lack of earnings delivery, with no dividends expected in the foreseeable future to support valuations of the share. We cut our TP to RM0.69 (from RM0.97 previously), pegged to 0.45x PBV of FY20E – slightly below -1.5SD of its 3- year mean.

Risks to our call: (i) higher-than-expected margins, (ii) fasterthan-expected order-book recognition, (iii) slowdown in jobs flow among local oil and gas brownfields, and (iv) significant job wins of sizable value.

Source: Kenanga Research - 30 May 2019