Uzma Bhd
(Nov 30, RM1.34)
Maintain neutral call with an unchanged target price of RM1.10. Uzma Bhd’s nine-month fiscal period ended Sept 30, 2016 (9MFY16) performance was weaker than the previous corresponding period, on the weaker oil price environment leading to fewer activities for drilling well services (DWS) and subsidiary MMSVS Group Holding Co Ltd’s operations. 

Revenue was RM332.3 million (falling 17.7% year-on-year [y-o-y]), while core net profit dipped to RM19.4 million (a decline of 35.8% y-o-y). 

The group’s results have, however, met 74% of our core earnings estimates, supported by an improved third quarter of financial year 2016 (3QFY16) performance which saw the highest core earnings contribution of RM8.7 million, though at only 55% of full-year forecasts. 

The group is nevertheless hindered by the unexpected absence of the Tanjong Baram risk service contract (RSC) remuneration fee which we have previously stated to be delayed until capital expenditure (capex) has been fully reimbursed.

Uzma’s 3QFY16 revenue came in at RM121.6 million (up 5.9% y-o-y) and core earnings at RM8.7 million (+61.3% y-o-y). 

The higher revenue was buoyed by geoscience and petroleum engineering, DWS, MMSVS, Uzma Integrated Solutions and Premier Enterprise Corp divisions, but offset by weaker performances from project oilfield operation services, drilling manpower, and Malaysian Energy Chemical and Services Sdn Bhd segments. 

The group’s cost rationalising initiatives have also continued to sustain gross profit margins at about 24% levels.

Uzma’s current gearing level is high, at 1.34 times, but stripping off the two major borrowings for the RSC and D18 water injection facility activities which are fully guaranteed by Petroliam Nasional Bhd (Petronas), core net gearing stands at 0.38 times as at 3QFY16. 

We understand that gearing will be pared down going forward, with contributions from these major projects expected from 2017.

The RSC remuneration fees will be Uzma’s major earnings catalyst, but it will not be accrued until Tanjong Baram RSC’s RM151.5 million capex has been fully reimbursed by Petronas.

This directive is due to the prolonged lower oil price levels, and thus would affect the lifting cost and hence profitability for the client. We could potentially see a substantial lump-sum fee incurred when the reimbursement plan is completed, though not in the near term.

We remain “neutral” on Uzma’s prospects. This takes into account the lower activities going forward, which could spill over to FY17 amid the non-accrual of the RSC remuneration fees, which would have given the group significant upside to its current valuations. — PublicInvest Research, Nov 30