UZMA’s 1QFY23 beat expectations thanks to improved work orders and job margins. Looking ahead, the group is poised to benefit from a recovery in local oil & gas sector activity levels, while its diversification into the solar energy space will help future-proof its longer-term prospects. We raise our FY23-24F net profit forecasts by 23-4%, lift our TP by 5% to RM0.67 (from RM0.64) and maintain our OUTPERFORM call.

Results exceeded expectations. 1QFY23 core net profit of RM13.6m beat expectations, coming in at 80% and 84% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecasts came largely from stronger recognition of work orders as well as the improved margins for its upstream oil and gas business.

Overall improved results. 1QFY23 earnings more than tripled YoY, amidst higher work orders as well as improved margins for its upstream oil and gas business, as last year was hampered by higher costs arising from the pandemic SOPs. Meanwhile QoQ, core profits also jumped 66%, slightly helped by improved sales from its trading division, but more prominently due to the lower tax expenses on reversal of over provisions in the previous financial year.

Benefitting from a rise in brownfield activities. Given UZMA’s unique positioning as a brownfield player in the local oil and gas space, we believe UZMA should eventually stand to benefit from the recovery of activities. Meanwhile, the group is also actively diversifying into the solar energy space, which might serve as a re-rating catalyst upon fruition.

Forecasts. Post-results, we raised our FY23-24F by 23-4% to account for the stronger work orders and improved job margins.

We like UZMA for: (i) it being a good proxy to elevated oil prices given its focus in the brownfield segment, providing a wide range of services such as well services, oil production enhancement and optimisation, as well as late-life operation and maintenance, and (ii) its diversification into the solar energy space which will help future-proof its long-term prospects.

We raise our TP by 5% to RM0.67 (from RM0.64), pegged to an unchanged valuation of 10x PER – based on a 33% discount ascribed to other local-centric oil and gas equipment and service provider peers (e.g. DAYANG, VELESTO), given UZMA’s far smaller market cap. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) significant pull-back in oil prices, weighing on oil & gas activities, (ii) project cost overrun and delays, and (iii) escalating input cost.

Source: Kenanga Research - 1 Dec 2022