Uzma expected to see improvement in FY20 earnings

This article first appeared in The Edge Financial Daily, on November 7, 2019.
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Uzma Bhd
(Nov 6, 97.5 sen)
Upgrade to market perform with a higher target price (TP) of RM1.05:
Uzma Bhd has announced that it is taking legal action against South Korea’s Khan Co Ltd and Kong Offshore Malaysia Sdn Bhd which were Uzma’s subcontractors for the KNPG-B Topside Ph II, Kinabalu Non-Associated Gas Development Project. Disputes arose when the companies under-delivered their subcontracted works, resulting in Uzma having to take over the said project’s execution. Uzma is seeking to claim a total sum of RM63.14 million plus interest comprising rectification and additional costs to complete the project, as well as all sums found to be overpaid by Uzma.

 
We are neutral on the news as project-related expenses linked to the disputes were already incurred in the financial year ended June 30, 2018 (FY18) and FY19, with the project already at 99% completion currently. As such, earnings impact, if any, can only be positive should the court rule in favour of Uzma.

While FY19 was an underwhelming year earnings-wise, dragged by its D18 project’s operational hiccups as well as costs related to the consolidation of Setegap Ventures Petroleum Sdn Bhd (since January 2019), we believe earnings should start normalising moving into FY20. Its D18 project is now operating at full capacity, while Setegap Ventures Petroleum is also expected to contribute more positively to its income given a higher effective stake. As for its upcoming first quarter of FY20 (1QFY20) results to be released later this month, we expect to see a sequential improvement from its 4QFY19 core net profit of RM7.2 million. We also believe Uzma is positioned to secure umbrella contracts.

We upgrade our call to “market perform” given its improving outlook. We raise our FY20/FY21 core net profit estimates by 56%/18%, accounting for higher job executions. We also raise our TP to RM1.05 (from 61 sen) after pegging a higher valuation of 0.6 times estimated price-to-book value for FY20, implying 10 times forward price-earnings ratio.

Risks to our call include: i) lower-than-expected margins; and ii) slower-than-expected order-book recognition. — Kenanga Research, Nov 6