1QFY20 results came in within expectations, with YoY improvements helped by operational normalcy returning to D18 project, on top of consolidation of Setegap Venture Petroleum. Overall, we see UZMA as a prime beneficiary of increased brownfield activities in Malaysia, with the group also positioned to benefit from plug and abandonment umbrella contract awards. Maintain MARKET PERFORM, but with lower TP of RM0.85.

Within expectations. 1QFY20 core net profit of RM7.2m (arrived after stripping off unrealised forex) came in within expectations at 22%/28% of our/consensus full-year earnings forecasts. No dividends were declared, as expected.

Earnings helped by lower taxes. YoY, 1QFY20 core net profit leapt significantly from 1QFY19 of merely RM0.5m. To recap, 1QFY19 disastrous earnings were dragged by operational hiccups in its D18 water injection project, which only registered an operational efficiency of only 40-50%. Since then, D18 has resumed to operational normalcy, with the project now at >90% operational efficiency. Additionally, the quarter was also helped by consolidation of Setegap Ventures Petroleum (acquisition completed in Jan 2019).

QoQ, 1QFY20 stayed flat, helped by lower effective tax rates (9% vs. 30%). On the core PBT level, earnings actually declined, dragged by slightly lower revenue on slower job billings, coupled with higher administrative and operating expenses.

Beneficiary of higher brownfield activities. We see UZMA as one of the first names to benefit from increased brownfield oil and gas activities locally, given its market leading position in Malaysia within the production enhancement space. Additionally, we believe UZMA is also positioned to benefit from more plug and abandonment jobs awards (via umbrella contracts).

Maintain MARKET PERFORM. Despite the in-line set of results, we trim both our FY20-21E earnings forecasts by 7%, as we slightly increased our costs assumptions. Our tax assumptions are kept unchanged (at 25%) to guard against any normalisation of tax rates in the coming quarters. Following the earnings cut, our TP is also lowered to RM0.85 (from RM1.05 previously), pegged to 0.5x PBV – which is -1SD from its 12- month mean, implying forward PER of c.9x. Note that our valuations have been lowered down a notch (from 0.6x previously), given the sequentially heightened opex despite lowered revenue, warranting slight concerns.

Risks to our call: (i) higher-than-expected margins, (ii) faster- than-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 - 28 Nov 2019