Review

• Uzma Bhd (Uzma) registered FY16 core net profit of RM24.9mn (-21.8% YoY) which is below ours’ and consensus estimates at 86% and 92% respectively. This is after excluding net forex gain of RM17.7mn.

• The deviation was mainly due to higher than expected depreciation and finance costs. This was due to an increase in asset base which we did not expect previously. Furthermore, Uzma’s JV contributions failed to impress, and registered a large YoY decline of 34.1% despite having secured the new CTU contract.

• FY16 revenue declined by 7.9% YoY as drilling activities was rather slow due to the lack of demand. Additionally, we believe discounts given to clients exacerbated the drop in revenue.

• We note that revenue grew by 17.7% QoQ which is rather commendable. This was likely due to Uzma’s water injection facility (WIF) finally coming online in 4Q. To recap, the WIF only commenced operations in Oct 2016 after some technical difficulties during hook-up and commissioning.

• We estimate that Uzma has recouped circa RM25mn of capex spent on its marginal field, Tanjong Baram, which is within expectations. Recall that total capex spent on the field was circa RM150mn.

Impact

• We increase our estimated depreciation and finance costs after incorporating FY16 numbers into our model. Thus, our earnings are reduced by 12.4%/10.5% for FY17/18 respectively. We make no other changes pending an analyst briefing later today.

• We also introduce FY19 earnings of RM38.0mn which implies a growth of 14.4%.

Outlook

• We expect Uzma’s earnings to continue to be sluggish moving forward. This is due to most of its clients adjusting costs in preparation for a new crude oil price norm of USD50/bbl. Hence, DCRs and utilisation rates of Uzma’s assets will be subdued.

• Uzma’s RSC for its marginal field, Tanjong Baram is unlikely to be terminated given its 1) low lifting cost and 2) higher than expected gas production which is given to Petronas at zero cost. However, as conservative measure, Uzma has elected to recognize zero earnings from the field.

Valuation

• Following the cut in earnings, our TP for Uzma is lowered to RM1.15 (previous: RM1.34) based on 11x CY17 PER. We maintain our SELL recommendation on Uzma. A huge re-rating catalyst will be the decision to recognize earnings from the Tanjong Baram field.

Source: TA Research - 27 Feb 2017