UZMA’s FY23 results trumped our forecast thanks to lower-than expected opex but just met market expectation. Its FY23 core net profit almost tripled YoY on the recovery in work flows post the pandemic, and maiden contribution from its LNG trading. We raise our FY24F earnings by 45%, lift our TP by 17% to RM1.05 (from RM0.90) and maintain our OUTPERFORM call.

Results exceeded our forecast. UZMA’s FY23 core net profit of RM39m exceeded our full-year forecast by 58% but only met the consensus estimate. The variance versus our forecast came largely from lower-than-expected opex at the O&G services segment.

Earnings recovery from normalization of work flows. Its revenue expansion (+23%) was driven by the upstream O&G services segment following the progressive recovery of work flows. To recap, O&G activity levels in FY22 were severely hit by movement control orders (MCO) implemented during the pandemic. The MCO restrictions were finally uplifted in early-CY22, which led to the resumption of works for UZMA’s projects. Additionally, maiden recognition of revenues in 4QFY23 from UZMA’s new venture in trading of Liquified Natural Gas (LNG) provided a boost to topline. Correspondingly, the above enabled UZMA to almost triple its profits in FY23. In addition, earnings were also uplifted by significant reduction in costs to comply with MCO restrictions.

Poised to benefit from uptick in contract awards from Petronas. Based on Petronas’ Activity Outlook (PAO) 2023-25, YoY demand will rise in: (i) topside maintenance, (ii) platform maintenance, construction and modification, and (iii) offshore hookup and commissioning. As such, given its established track record, we believe that UZMA is leveraged towards a recovery in daily charter rates (DCR), fleet utilization and new contract awards. In addition to the above, UZMA is also exploring expansion into other O&G upstream services via its recent MOU with Malaysia Marine and Heavy Engineering. This includes: (i) floater conversion or modification, and (ii) renewable energy solutions. Similarly, based on PAO, activity levels are expected to be higher for fabrication of wellhead platforms. Hence, this will benefit UZMA given that circa 80% of its YTD revenues emanate from Petronas contracts in Malaysia.

Forecasts. We raise our FY24F earnings by 45% to reflect lower opex at the O&G services segment and also on higher order book recognition. In addition, we also introduce our FY25F numbers.

We also lift our TP by 17% to RM1.05 (from RM0.90) as we roll forward our valuation base year to FY25F (from FY24F). Our valuation basis is unchanged at 10x forward PER, at a 33% discount to the 15x we ascribed to its local oil and gas equipment and service provider peers (e.g. DAYANG, VELESTO), given UZMA’s smaller market cap. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like UZMA due to: (i) it is a beneficiary of the current upcycle in oil price that leads to increased O&G contract flows, (ii) its active thrust into sustainable businesses via its new energy segment enhances UZMA’s ESG appeal and future proofs its earnings, and (iii) the looming launch of its 50MW large scale solar plant that will boost its recurring income and hence anchor earnings stability. Maintain OUTPERFORM.

Risks to our call include: (i) premature end to industry upcycle following a dip in oil prices, (ii) poor project execution leading to cost overruns and delays, and (iii) opex pressure emanating from an inflationary environment, particularly on expenses for manpower and materials.

Source: Kenanga Research - 28 Aug 2023