This article first appeared in The Edge Financial Daily on September 5, 2017 - September 11, 2017

Uzma Bhd 
(Aug 30, RM1.30)
Maintain outperform call with an unchanged target price (TP) of RM1.65: We understand that the second quarter financial year 2017 (2QFY17) core earnings were profitable, at RM4.7 million (-57% quarter-on-quarter [q-o-q], -13% year-on-year [y-o-y]), rather than initial losses of RM1.2 million with additional two one-off items, that is the RM2.6 million additional deferred tax charge and RM3.3 million additional provision. Thus, the cumulative first half FY17 (1HFY17) core earnings of RM15.7 million (+47% y-o-y) were within management’s expectations, anticipating stronger 2HFY17 backed by: i) unbilled RM35 million to RM 38 million work performed for the Kinabalu project in the 2QFY17; ii) stronger associate earnings due to pick up in CTU (coiled tubing) jobs; and iii) higher work orders from contracts secured. 

Apart from the unbilled work for the Kinabalu jobs, the management explained that the 21% decline in 1HFY17 top line was caused by lower execution of manpower jobs, which typically fetches lower profit after tax (PAT) margins of 2-3%, resulting in PAT margin improvement to 9.5% in 1HFY17 from 5.1% in 1HFY16. Note that these jobs contributed <10% of total revenue in 1HFY17 versus 35%-40% of FY16 revenue.

In view of slower-than-expected work orders, the hydraulic workover unit’s (HWU) utilisation is likely to stay flattish or at best improve slightly than last year’s 30+% level. Having said that, MMSVS Group Holdings Co Ltd is anticipated to break even or register a small profit this year to help by cost optimisation, improving from RM6 million losses in FY16 (versus RM1 million losses in 1HFY17). 

Moving forward, management is excited about Uzma’s tender book given the exciting ongoing RM2 billion bids, including experimental supply and installation of non-metallic pipes , installation of electrical submersible pipes, reinforced thermal pipes jobs and water injection projects. 

Despite core earnings for 1HFY17 being adjusted to RM15.7 million from RM9.8 million following the additional adjustments made on one-off items, we decided to maintain our FY17 and FY18 earnings forecasts at RM35.3 million and RM40.3 million, implying y-o-y growth of 23% and 14%, respectively, given that HWU operations may not pick up as strong as initially expected. 

We believe the recent share price weakness to the year-to-date (YTD) low of RM1.30 level (YTD -24%) is overdone and, thus, we believe the current level is an attractive entry level given undemanding valuation of 0.8 times FY18 estimates of price-to-book value ratio (PBV) and 10.3 times FY18 price-earnings ration. Thus, we maintain our outperform call on Uzma with an unchanged TP of RM1.65/share pegged at 1.0 times FY18 estimate PBV premising on its ability to innovate multiple solutions to oil majors amid a challenging environment. 

Risks to our call: 1) weaker-than-expected recovery in the oil and gas market; 2) slower-than-expected delivery in D18 water injection project; and 3) lower-than-expected margins. — Kenanga Research, Aug 30