We left Uzma’s analyst briefing feeling cautiously optimistic after the release of its 4Q16 results. This is underpinned by 1) full year contribution from WIF, 2) full year contribution from CTU, 3) new wireline umbrella contract awarded and 4) higher utilisation of HWUs in 2017. However, we believe there Uzma’s earning will remain volatile going forward as there is significant execution risk for its contracts. Hence, we revise our valuation methodology to P/B (previously PER). This is consistent with other oil and gas service providers under our coverage. Therefore, our TP is increased to RM1.40 based on 0.9x CY17 P/B. Maintain Sell.

Key takeaways from the analysts’ briefing are as below:

• Uzma’s revenue (-8% YoY) fell slightly as they granted discounts to its clients. However, management highlighted that gross profit (GP) increased by 5.5% as it also squeezed its suppliers.

• Uzma is expected to recognise volatile forex gains and losses going forward due to application of MFRS 121 accounting standard. This is attributed to D18 water injection facility (WIF), which is parked under a Labuan company where earnings are denoted in USD. On the other hand, D18’s loan was secured by Uzma Engineering, a local company. Hence, amount owed to the holding company fluctuates based on the USD exchange rate.

• 4Q16 results included several unexpected items, including: 1) RM1.1mn deferred tax, 2) RM1.2mn doubtful debts, and 3) RM1.5mn additional expenses from D18 WIF. Excluding these items, Uzma’s profit would be circa RM28-29mn.

• We note that the unexpected expansion in FY16 asset base was attributed to: 1) D18 WIF, which previously had significant delay in commissioning, 2) two new uzmAPRES units, and 3) one new coil-tubing unit. Management estimates that moving forward, capex will be lower at RM40mn p.a.

• Gearing increased significantly to 1.12x from 0.68x in FY16. However, if borrowings from D18 and Tanjong Baram are, Uzma’s earnings will be at circa 0.38x.

• Tender activities have picked up where Uzma and other oil and gas service providers have received invitations to bid. However, converting the bids to wins remains a challenge. Uzma estimates its bid book at circa RM3bn.

• Full year contribution from CTU and D18 WIF will boost earnings in FY17. Recall that earlier in FY16, Uzma’s earnings disappointed due to the gestation period for CTU and technical difficulties for D18 WIF. To recap, D18 WIF is a 5 year contract with DCR of circa RM200K and is expected to have 95% uptime. Meanwhile, the CTU contract is a 5 year, RM400mn contract which will be recognised as JV contribution.

• HWU utilisation is expected to increase dramatically to an average of 6.5 units working in FY17 (FY16: 2.8 units). This is due to the recent HWU Lundin contract win, coupled with contract bids for P&A (plug and abandonment).
   
• Uzma’s orderbook has increased to RM2.6bn from RM2.18bn previously. Management believes that FY17 will be Uzma’s best year with a revenue growth of 15% YoY. It also expects 2H17 earnings to be stronger than 1H, as several new contracts are still at their initial stages.

Impact

• We made the following changes to our earnings forecast 1) increased HWU utilisation rate assumptions slightly, 2) increased orderbook replenishment assumption to RM100/125/150mn in FY17/18/19 from RM75/100/125mn previously, 3) tweaked CTU and D18 contract contributions slightly, and 4) adjusted crude oil price assumption to our in-house forecast.

• Thus, our earnings are increased by 8.1%/7.2%/7.2% for FY17/18/19.

Valuation

• Given near-term earnings volatility, we revise our valuation methodology to P/B (previously PER). This is to be consistent with other oil and gas service providers under our coverage. Therefore, our TP is increased to RM1.40 based on 0.9x CY17 P/B. This implies parity with sector bellwether SapuraKencana Petroleum. We believe this is justified due to Uzma’s higher earnings growth and resilient assets, which are less affected by cyclicality. Maintain Sell. A major re-rating catalyst will be the decision to recognise earnings from Tanjong Baram RSC.

Source: TA Research - 28 Feb 2017