UZMA is suing two subcontractors to recover overpayments on the Kinabalu construction project. Overall, we are neutral as related expenses from the dispute has already been incurred in FY19A, and hence, earnings impact (if any) can only be positive should the court rule in favour of UZMA. Meanwhile, outlook for the company is also expected to improve, bouncing back from an underwhelming FY19. Upgrade to MP with TP of RM1.05.

Uzma sues to recover monies. Earlier, UZMA announced that it is taking legal action against South Korea’s Khan Co Ltd and Kong Offshore Malaysia who were UZMA’s subcontractors for the KNPG-B Topside Ph II, Kinabalu Non-Associated Gas (NAG) Development project. Disputes arose when the companies under-delivered their subcontracted works, resulting in UZMA having to take over the said project execution. UZMA is seeking to claim a total sum of RM63.14m plus interests comprising of rectification and additional costs to complete the project, as well as all sums found to be overpaid by UZMA.

Neutral on the impact. Overall, we are neutral on the news, as projectrelated expenses linked to the disputes have already been incurred in FY18-19A (i.e. no additional negative earnings impact moving forward), with the project already at 99% completion currently. As such, earnings impact (if any) can only be positive should the court rule in favour of UZMA. For illustration purposes, the aforementioned sum of RM63.14m (excluding interests) represents an upside of >100% on our FY20E numbers.

Operational earnings expected to improve. While FY19A has generally been an underwhelming year earnings-wise, dragged by operational hiccups in its D18 project as well as costs related to the consolidation of Setegap Ventures Petroleum (consolidated since Jan- 2019), we believe earnings should start to normalise moving into FY20. Particularly, we gathered that its D18 project is now operating at full capacity, while Setegap Ventures Petroleum is also expected to contribute more positively towards its income statement given the higher effective stake. As for its upcoming 1QFY20 (results release expected later this month), we are to see some sequential improvements from its 4QFY19 core net profit of RM7.2m (arrived after stripping-off impairments and unrealised forex). Meanwhile, we believe UZMA is also positioned to secure umbrella contracts, especially within the plug & abandonment and production enhancement space, as local brownfield activities are on the rise.

Upgrade to MARKET PERFORM, given its improving outlook on the back of: (i) normalised earnings levels expected moving forward, and (ii) beneficiary of increased local brownfield oil and gas activities, translating to potential contract wins. Post-relook, we raised our FY20E/FY21E CNP by 56%/18%, accounting for higher job executions. Meanwhile, our TP is also raised to RM1.05 (from RM0.61 previously), after pegging higher valuations of 0.6x PBV on FY20E, implying 10x forward PER (from previous valuation of 0.4x PBV at “floor” of -1.5SD from its mean).

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

Source: Kenanga Research - 6 Nov 2019