4Q19 bounced from losses sequentially, driven by higher revenue due to improved performance from Setegap Petroleum Ventures - exceeding our forecast but below consensus’ expectations. While FY19 had been another underwhelming year, we posit that the low-base could translate into some recovery moving forward. Maintain MARKET PERFORM, with TP of RM0.61.

Exceeded our, but below consensus’ expectation. UZMA recorded FY19 core net profit of RM9.7m (arrived after adjustment for non-core items, e.g. re-measurement gains, impairments and unrealised forex) – exceeding our full-year forecast of RM7.2m due to our over-conservative margins assumption. However, the results were below market’s expectations by 35% of consensus forecasts, possibly due to consensus’ low fixed costs assumption. No dividends were declared, as expected.

Weak YoY, but rebounded from losses QoQ. 2Q19 recorded core net profit of RM7.2m, rebounding sequentially from core losses of RM4.9m last quarter, thanks to higher revenue (+25%) while core fixed operating costs stayed relatively flat. The improved revenue was driven by improved performance from Setegap Petroleum Ventures (consolidated since Jan 2019). YoY, 2Q19 core net profit plunged 38%, despite the surge in revenue (+68%), dragged by its elevated fixed costs which have been plaguing the company for the past several quarters.

Cumulatively, FY19 core net profit plunged 75% YoY, dragged by higher fixed costs (operating, finance and tax expenses). Particularly, the company recorded losses in 3Q19, and only RM0.5m core profit in 1Q19, due to the aforementioned higher costs and operational utilisation issues.

Better numbers for FY20? While FY19 had largely been another underwhelming year, we posit that the low-base earnings could potentially set up FY20 as a recovery year. Operationally, the D18 project is currently running at full capacity after some downtime earlier, while the full-year consolidation of Setegap Petroleum Ventures would also help contribute additional revenue. Overall, we view UZMA as a conceptual beneficiary of higher brown-field activities from Petronas.

Maintain MARKET PERFORM. Nonetheless, we lowered our TP to RM0.61, pegged to 0.4x PBV on FY20E (from RM0.76 at 0.5x PBV previously), as we feel lingering earnings delivery risks may still be present, coupled with the absence of dividends in the foreseeable future to support valuations. Our ascribed valuation is close to -1.5SD below its 5-year mean. Post-results, we made no changes to our FY20E numbers, while simultaneously introducing FY21E numbers.

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 - 29 Aug 2019