UZMA’s 1QFY24 results beat expectations due to higher-thanexpected work orders at its hydraulic workover unit (HWU) and coiled tubing unit. Its upstream services will continue to drive earnings over the near term. We raise our FY24F and FY25F earnings by 15.6% and 16.4%, respectively, lift our TP by 16% to RM1.22 (from RM1.05) and maintain our OUTPERFORM call.

Strong 1Q. UZMA’s 1QFY24 core profit of RM16.3m (after excluding RM2.4m unrealised forex loss and RM2.0m deferred tax loss) beat expectations at 41% and 36% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from higher work orders at its HWU and coiled tubing units.

Upstream services drove earnings. YoY, its 1QFY24 revenue surged 24.1% driven by stronger performance at its upstream services division (driven by ramp-up in work orders) and trading division (LNG). Its core net profit also improved 19.8% YoY due to stronger upstream services and trading division’s EBIT contribution albeit being slightly offset by higher cost of sales as a result of increase in labour costs.

QoQ numbers driven by better upstream services margins. Its 1QFY24 revenue improved 19.3% QoQ driven by upstream services revenue ramp-up due to higher upstream activities but this was partially offset by weaker trading division and new energy division revenue. Its core profit jumped 53.0% as overhead costs (head office and unallocated overheads) were lower QoQ.

Upstream services still the growth anchor. With an orderbook of RM2.4b (of which upstream services accounts for RM1.6b), UZMA is poised to see further jump in work orders as Petronas is expected to ramp up its brownfield (producing oilfields) activities. Its new energy division is still in EPCC stage with Earthwork Plan Approval from Majlis Perbandaran Sungai Petani (MPSPK) on 12 June 2023 with the solar plant starting up in 1QFY25 but we expect earnings contribution to be minimal.

Forecasts. We raise our FY24F and FY25F earnings by 15.6% and 16.4%, respectively, after reflecting stronger upstream services revenue on the back of stronger work order outlook in the coming years.

Correspondingly, we lift our TP by 16% to RM1.22 (from RM1.05) pegged to an unchanged FY25F 10x PER, which is consistent with the average PER for small to mid-cap upstream services players. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like UZMA due to: (i) it being a beneficiary of the current upcycle in upstream activities leading to increased O&G contract flows, (ii) its active thrust into sustainable businesses via its new energy segment which enhances UZMA’s ESG appeal and help future proof its earnings, and (iii) the looming launch of its 50MW large scale solar plant that will boost its recurring income and hence anchor earnings stability. Maintain OUTPERFORM.

Risks to our call include: (i) premature end to industry upcycle following a dip in oil prices, (ii) poor project execution on new energy division leading to cost overruns and delays, and (iii) opex pressure emanating from an inflationary environment, particularly on expenses for manpower and materials.

Source: Kenanga Research - 23 Nov 2023