Uzma reported a 5.6% QoQ improvement in revenue to RM111.4m for 3QFY19. It reported a significant drop in its earnings by almost 100% to RM0.4m only however, despite gross profit margins remaining stable at c. 35%. Cumulatively, 9MFY19 revenue and core earnings are only RM304.5m and RM8.0m respectively, missing our and consensus estimates at only 27% and 32% of full-year forecast. The drag this current quarter was mainly due to lower contribution from the Group’s technology and production services segment which saw declines of 47.2% and 24.6% QoQ respectively. In light of the slower-than-expected recoveries being seen, we are lowering our FY19 - 21 earnings estimates by an average 50.4%. Our call is consequently downgraded to Underperform with a much lower TP of RM0.57 (RM1.12 previously) based on 10x multiple to FY20 EPS. Uzma’s earnings outlook is less exciting at this juncture.

• Results highlight. While there is likely to be additional contribution to earnings this quarter, particularly from the Pulai A project, various HWU projects in Malaysia, Thailand and China and Setegap Ventures following the acquisition of another 15% stake, productivity has been significantly slower than expected due to the monsoon season and shorter work months, resulting in lower operating rates on certain services. The D18 operated at 80% capacity in 3QFY19 compared to 100% in 2QFY19. While revenue reported an increase of 5.6% QoQ supported by its Integrated Well Solutions division (+52.1% QoQ), core earnings however dropped by almost 100% this quarter.

• Recovery may take longer than expected. The discrepancy in our forecast versus reported numbers are actually due to the Pulai A Plug & Abandonment project. Although contributions improved this current quarter, recognition was below expectations. This is mainly due to the extension of the contract’s lifespan to Sept 2020 from June 2019 initially. Hence, earnings contribution will be spread over up to 1QFY21. While it is making good progress, works are taking longer than expected, with 30 days spent per well from the previously guided of 17 days/well. Uzma is currently working on well #7 from a total of 22. Total Group orderbook currently stands at RM1.3bn, with RM800m in firm contracts and estimated RM500m likely from umbrella contracts. Tender book remains healthy at RM3bn.

Source: PublicInvest Research - 30 May 2019