We returned from an analyst briefing feeling positive about UZMA’s prospects. The group is poised to continue benefitting from the increase in local activity levels, and expected to post stronger earnings ahead. Meanwhile, the group is also actively expanding its solar business, and currently is in bids for several government-driven solar programmes. We maintain our forecasts, TP of RM0.67 and OUTPERFORM call.

Post results’ analyst briefing. We recently attended a post results’ analyst briefing organised by UZMA. To recap, its recently announced 1QFY23 results saw core earnings surging 66% QoQ and more than tripled YoY, thanks to improved activities especially as new projects commenced.

Overall, we returned from the analyst briefing feeling positive, with our upbeat views on the stock mostly remaining intact. The key takeaways are as follows:

1. Bottom-line boosted by trading business. Also contributing to its bottom-line this quarter was the group’s trading business, of which it is starting to ramp up efforts. Although this may result in slight erosion in overall group margins, as trading margins are far lower than upstream oil and gas margins, this new business will undoubtedly still contribute to the group’s bottom-line. Note that the group’s margins have been steadily rising over the past few years as the group gradually shift its focus away from lower margin jobs.

2. Promising jobs. Post winning its recent D18 water injection contract, its O&G order book currently stands at ~RM2b, of which roughly half is from umbrella contracts. Meanwhile, its new energy order book still stands at ~RM1b, mostly from the LSS4 PPA. The group is currently bidding new solar jobs worth of RM145m, which consists of government-driven solar programmes such as NEM as well as the newly launched VPPA.

3. Stronger quarters ahead. In tandem with the gradual recovery of local oil and gas activity levels, the group foresees that upcoming quarters will continue growing from strength to strength. Petronas has indicated increased decommissioning and brownfield activities, as stated in its activity outlook, which will benefit UZMA.

Forecasts. Maintained.

Maintain OUTPERFORM, with an unchanged TP of RM0.67 – pegged to 10x PER based on 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).

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.

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 - 5 Dec 2022