UZMA’s 1HFY24 results beat expectations. Its 1HFY24 core net profit surged 32% YoY driven by an uptick in upstream services, while costs rose at a slower pace. We raise our FY24-25F earnings forecasts by 13% and 16%, respectively, lift our TP by 10% to RM1.45 (from RM1.32) and maintain our OUTPERFORM call.

Above expectations. UZMA’s 1HFY24 core profit of RM30.7m (after excluding RM4.1m unrealised forex loss and RM2m deferred tax expense) beat expectations at 61% and 62% of our full-year forecast and the full-year consensus estimate, respectively. The positive variance primarily resulted from lower-than-anticipated cost of sales and administrative expenses.

Margins expanded. YoY, UZMA's 1HFY24 revenue saw an 11% increase, fuelled by growth in upstream services, especially from the expansion of the artificial lift and petrochemical trading sectors. Its core profit rose at a more rapid pace of 32%, attributed to a modest 5% YoY rise in cost of sales coupled with a 7% reduction in administrative expenses.

QoQ numbers down due to lower integrated well activities. In 1HFY24, UZMA's revenue fell 9% QoQ, attributed to a slowdown in integrated well services activities during the monsoon season. Net profit experienced a sharper decline of 12% in the same period, as the reduction in cost of sales did not decrease as quickly. However, a decrease in administrative expenses quarter-over-quarter partially offset the downturn.

Work orders to ramp up. With an order book valued at RM2.4b, UZMA is well-positioned to benefit from an increase in work orders as Petronas intensifies its upstream activities. We anticipate that the group will sustain its momentum in order book replenishment, aiming for RM1b in FY25. Additionally, UZMA's new energy division is on track with the Sungai Petani Power Purchase Agreement (PPA) set to commence operations in 1QFY25, and no further delays are anticipated.

Forecasts. After revising our gross margin assumptions from 38% to 40% and anticipating increased work orders for the upstream services division, we have adjusted our earnings forecasts for FY24 and FY25 upwards by 13% and 16%, respectively.

Valuations. Correspondingly, we lift our TP by 10% to RM1.45 (from RM1.32) pegged to an unchanged CY25F 10x PER, which is consistent with the average PER for small to mid-cap upstream services players. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like UZMA due to: (i) it being a beneficiary of the current upcycle in upstream activities leading to increased O&G contract flows, (ii) its active thrust into sustainable businesses via its new energy segment which enhances UZMA’s ESG appeal and help future proof its earnings, and (iii) the looming launch of its large-scale solar plant that will boost its recurring income. Maintain OUTPERFORM.

Risks to our call include: (i) premature end to industry upcycle following a dip in oil prices, (ii) poor project execution on new energy division 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 - 21 Feb 2024