This article first appeared in The Edge Financial Daily on May 26, 2017

Uzma Bhd
(May 25, RM1.73)
Upgrade to buy with an increased target price (TP) of RM2.03: Uzma Bhd’s first quarter ended March 31, 2017 (1QFY17) core net profit came in at RM7.5 million, accounting for 18.5% of our forecast and 18.3% of consensus. It is deemed within expectations as we expect a much stronger performance in the second half of financial 2017 (2HFY17).

Year-on-year, core net profit surged 43.5% in 1QFY17 driven by better profitability from the services division contributed by the D18 project on higher earnings before interest and tax (Ebit) margin, and lower tax rate due to allowances from the Malaysian Investment Development Authority.

Quarter-on-quarter, core net profit posted a 76.2% jump, mainly driven by higher margin achieved in the services division (due to the D18 contribution), and higher tax incentive.

However, it was partially offset by weaker chemical top line and Ebit due to non-extension of certain contracts executed in 4QFY16.

Looking forward, the group is expected to post stronger profit for its services segment in 2HFY17 as its new contracts secured earlier this year would start contributing, spanning two to three years.

The current order book of the group is estimated to be at RM2 billion, implying 3.5 times order book cover ratio. While it appears to be significant, actual core earnings of the group are dependent on the final work orders issued during the contract tenure as it is based on call up from the clients.

For its trading division, performance is expected to be subdued in 2017 due to tepid demand for oilfield chemicals while pricing in the industry has become more competitive.

Risks include delays in contract disbursement and execution risk while we maintain the forecast.

For Uzma, 2017 is a year to look forward to with full-year contribution expected from D18 coupled with anticipated improvement in services division backed by its huge order book.

Therefore, we upgrade Uzma to a “buy” with TP raised to RM2.03 from RM1.70 based on an unchanged 12 times price earnings ratio as we roll forward our valuation to FY18. — Hong Leong Investment Bank Research, May 25