This article first appeared in The Edge Financial Daily, on February 16, 2016.

Uzma Bhd
(Feb 15, RM1.62)
Maintain hold with a lower target price (TP) of RM1.66: The group’s general activity remains intact despite capital expenditure (capex) and operating expenditure (opex) cuts by Petroliam Nasional Bhd (Petronas) as Uzma Bhd’s main business is brownfield production maintenance.

Surprisingly, the group’s geoscience and petroleum engineering division was kept busy throughout 2015 despite the plunge in crude oil prices with oil producers deciding to continue their geoscience studies to embrace for a recovery in the industry.

The D18 Water Injection Project is still expected to proceed as planned despite its relatively bigger upfront investment as Petronas still considers it as a necessary opex. Currently, hook-up and commissioning works are being done on the project. Earnings would start to contribute from the second quarter of 2016 (2Q16) onwards, consistent with our earlier expectations.

Tanjung Baram risk service contract has started contributing since 1Q16 after the rectification of problems faced earlier during tie-in with Petronas.

However, erosion of margins is unavoidable across all its major segments amid overall downturn of the industry. This is driven by stronger price competition from foreign oilfield services players.

This year would be a year of consolidation for the group as it intends to realise cost savings through removal of operational duplications after the takeover of seven new businesses in the past two years. In the meantime, the group would slowdown its acquisition activities to conserve more cash in anticipation of tough times ahead.

We have cut our financial year 2016 earnings forecast by 18.2% to RM52.7 milllion by adjusting our earnings before interest and taxes margin assumption downwards to 12.3% from 15.3% previously, after taking into account the imminent margin erosion amid low oil prices.

We maintain our “hold” call with a lower TP of RM1.66 based on unchanged nine-time calendar year 2016 price-earnings ratio post earnings downgrade. — Hong Leong Investment Bank Research, Feb 15