UZMA is upbeat on its FY24 earnings growth prospects driven by: (i) a strong order flow as oil producers focus on enhancing production at their brownfield facilities (vs. green field projects), and (ii) sustained margins. We take a more conservative view on its margins given sustained cost pressures. We maintain our forecasts, TP of RM1.05 and OUTPERFORM call.

We came away from a recent engagement with UZMA feeling upbeat of its overall prospects. The main takeaways are as follows:

1. Upbeat on earnings growth. UZMA is upbeat on its earnings growth prospects in FY24 driven by: (i) a strong order flow, and (ii) sustained margins. 

It expects a pick-up in brown field upstream activities locally as oil producers focus on enhancing production at their existing facilities given that brown field jobs require less long-term cost commitments (vs. green field projects). We believe that we have adequately reflected in our forecast 22% YoY expansion in UZMA’s FY24 top line.

On the other hand, we are keeping our more conservative assumption of its EBIT margin normalising to to 12.7% in FY24 (vs. 22.5% in FY23), premised on sustained elevated cost pressures in the upstream services industry.

2. Solar project on track. The group’s 50MW solar project in Sungai Petani is currently at the site clearing stage. It is on track for full commencement by FY25. We expect a PAT contribution of c. RM2m-RM3m per annum based on RM0.20/kwh tariff assumption.

To recap, the group has secured an extension from Energy Commission (EC) for the power purchase agreement tenure from 21 to 25 years for this 50 MW LSS4 project.

Forecasts. Maintained.

We also keep our TP of RM1.05 pegged to 10x FY25F EPS, which is consistent with the average forward PER for small-mid cap upstream service players.

Outlook. Petronas has already shown strong signs of ramping up its demand for upstream maintenance or brownfield related activities with Petronas Activity Outlook 2023-2025 stating that it requires 21 Hydraulic Workout Units (HWU). This would indicate a hike in demand for UZMA’s HWU fleet size.

We continue to like UZMA for: (i) it being a major player in brown field upstream services sub-segment which is undergoing a boom in activities, (ii) its improved cost structure following its cost rationalisation efforts in recent years, and (iii) the broadening of its earnings base via its venture into solar power generation.

Risks to our call include: (i) an early reversal of industry up-cycle following a significant 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 - 20 Oct 2023