We returned from a management meeting feeling positive, given a likely earnings recovery following its disappointing 3Q19 results, coupled with potential contract replenishments via its upcoming LSS3 tenders. UZMA is highlighted for its expertise in the unique space of production enhancement services, poised to be a prime beneficiary of increased brownfield activities. Upgrade to MP with TP of RM0.76.

Beneficiary of increased brownfield activities. Given the company’s expertise within the oil and gas sector, operating in a unique space providing production enhancement and plug-and-abandonment services, UZMA is understood to be a prime beneficiary of increased oil and gas brownfield activities within the region. The company’s technological proficiency, especially in production enhancement solutions, allows the company to be able to weather through difficult business environments even at low oil prices, leveraging on its expertise on improving economic feasibility of production fields. This also makes the company a distinctive name within the sector, with little to no like-for-like directly comparable peer currently listed in Bursa.

Stronger earnings expected to come. While its recent 3Q19 results have unfortunately disappointed, dragged by various unforeseen oneoffs, we gathered that earnings should start to normalise in the following quarters, underpinned by anticipated strong contribution from Setegap Ventures Petroleum Sdn Bhd (SVP). Note that the upcoming 4Q19 quarter represents the first full quarter reflecting the consolidation of SVP’s numbers, after UZMA had completed its additional 15% stake in the company to increase its holdings to 64% in Jan-2019.

Positive on tender for LSS3. The company is currently in the midst of working on tendering for several Large-Scale Solar 3 (LSS3) projects, at varying equity stakes ranging from 40% to 80%, with potential partnership with large multinational corporation. If successful, this would represent the company’s maiden entry into the renewable energy sector. As such, we believe the partnering would be vital in providing experience on the operational side of the project, while UZMA could also somewhat leverage on its existing expertise during the engineering and construction phase of the project. Ultimately, we view this as a positive development for the company, providing it with another additional stream of stable earnings, while also increasing the sustainability of the company’s range of businesses.

Upgrade to MARKET PERFORM. Overall, we returned from our management meeting feeling positive, given its seemingly increased optimistic outlook from (i) likely earnings recovery, and (ii) possible contract replenishments. As such, we raised our TP to RM0.76 (from RM0.61 previously), pegged to 0.5x PBV – which is roughly between -1 and -1.5SD below its mean PBV valuations. Following so, our call is also upgraded to MARKET PERFORM. No changes were made to our FY19-20E numbers.

Risks to our call: (i) lower-than-expected margins, (ii) slower-thanexpected order-book recognition.

Source: Kenanga Research - 2 Jul 2019