Despite Uzma Bhd (Uzma) upbeat FY24 earning growth prospects, Kenanga Research (Kenanga) is cautions on the group’s margin due to continuous cost pressure.
The growth was driven by a strong order flow as oil producers focus on improving production of its brownfield facilities, its sustained margin, its improved cost structure, and its strategic move into solar power generation.
According to the research’s house note today (Oct 20), it said that it is keeping a more conservative assumption of its earnings before interest and taxes (EBIT) margin normalising to 12.7% in the financial year ending June 30, 2024 (FY24) due to sustained cost pressure in the upstream services industry, compared to 22.5% in FY2023.
However, Kenanga maintains its OUTPERFORM call on Uzma at the back of positive earnings growth with TP of RM1.05 pegged to 10 times of FY25F earnings per share (EPS), which is consistent with the average forward PER for small-mid cap upstream service players.
“Uzma expects a pick-up in brown field upstream activities locally as oil producers focus on enhancing production at their existing facilities given that brown field jobs require less long-term cost commitments (vs. green field projects).
“We believe that we have adequately reflected in our forecast 22% year-on-year (YoY) expansion in UZMA’s FY24 top line.”
Kenanga said the group’s 50MW solar project in Sungai Petani is on track to start next year, and is currently at the site clearing stage.
“We expect a provident and tax (PAT) contribution of RM2 million to RM3 million per annum based on RM0.20/kwh tariff assumption, after the group has secured an extension from Energy Commission (EC) for the power purchase agreement tenure from 21 to 25 years for this 50 MW LSS4 project,” it said.
On Uzma’s future outlook, the research body forecasts a hike in demand for Uzma hydraulic workover unit (HWU) fleet size.
It said that this is because Petronas has already shown strong signs of ramping up its demand for upstream maintenance or brownfield related activities with Petronas Activity Outlook 2023-2025 stating that it requires 21 Hydraulic Workout Units (HWU)
“Risks to our call include an early reversal of industry up-cycle following a significant dip in oil prices, poor project execution leading
to cost overruns and delays and opex pressure emanating from an inflationary environment, particularly on expenses for manpower and
materials.
