Uzma Bhd
(July 2, 70 sen)
Upgrade to market perform with a higher target price (TP) of 76 sen: Given Uzma Bhd’s expertise within the oil and gas (O&G) sector, operating in a unique space providing production enhancement and plug-and-abandonment services, the company is understood to be a prime beneficiary of increased O&G brownfield activities within the region. Uzma’s technological proficiency, especially in production enhancement solutions, allows the company to be able to weather difficult business environments even at low oil prices, leveraging on its expertise on improving economic feasibility of production fields. This also makes the company a distinctive name within the sector, with little to no like-for-like directly comparable peers currently listed on Bursa Malaysia.

While its recent third quarter of financial year 2019 (3QFY19) results have unfortunately disappointed, dragged by various unforeseen one-offs, we gather that earnings should start to normalise in the following quarters, underpinned by anticipated strong contribution from Setegap Ventures Petroleum Sdn Bhd (SVP). Note that the upcoming 4QFY19 quarter represents the first full quarter reflecting the consolidation of SVP’s numbers, after Uzma had completed its additional 15% stake in the company to increase its holdings to 64% in January 2019.

The company is currently in the middle of working on tendering for several Large-Scale Solar 3 projects, at varying equity stakes ranging from 40% to 80%, with a potential partnership with a large multinational corporation. If successful, this would represent the company’s maiden entry into the renewable energy sector. As such, we believe the partnering would be vital in providing experience on the operational side of the project, while Uzma could also somewhat leverage on its existing expertise during the engineering and construction phase of the project. Ultimately, we view this as a positive development for the company, providing it with another additional stream of stable earnings, while also increasing the sustainability of the company’s range of businesses.

Overall, we returned from our management meeting feeling “positive”, given its seemingly increased optimistic outlook from: i) likely earnings recovery; and ii) possible contract replenishments. As such, we raised our TP to 76 sen (from 61 sen previously), pegged at a 0.5 times price-to-book value (PBV) — which is roughly between -1 and -1.5 standard deviation below its mean PBV valuations. Following so, our call is also upgraded to “market perform”. No changes were made to our FY19-20 estimate numbers.

Risks to our call are lower-than-expected margins, and slower-than-expected order book recognition. — Kenanga Research, July 2