Solar Revenues To Flow From FY23, Priced In Cost Uncertainties
While maintenance O&G activities should gradually recover, Uzma’s aggressive non-O&G diversification (especially into solar) is expected to contribute to meaningful
revenue from FY23. We factor in solar revenue forecasts for FY23/24, but remain
conservative on earnings given the overall uncertainties on all LSS4 projects. That said,
current price levels have largely factored in these risks, and earnings delivery remains
crucial for re-rating. Maintain BUY with adjusted target price of RM0.56.
WHAT’S NEW
• Upcoming 3QFY22 results on 26 May 22. The quarter is expected to be weak in tandem
with slow activities during the monsoon season. That said, we understand that revenue is
likely better qoq (2QFY22: RM76m, core profit: RM2m), which can be largely attributed to
the relaxation of COVID-19 quarantine measures. Some projects in the previous quarter
were deferred to 2022, resulting in RM20m/10m revenue and gross profit impact. Four new
projects commenced operations towards end-3QFY22 (ie Mar 22), which are the three-year
Risk Transfer Incentive Contract (RTIC) for Petronas for Production Enhancement services,
Plug & Abandonment (P&A) works for Enquest, two-year non-rig assisted (NRA) electric
wireline logging for ExxonMobil, and P&A for T7Global, whereby Uzma is the subcontractor
for the hydraulic workover units (HWU).
• Beneficiary of improving demand for well intervention/workover services. The
Petronas Activity Outlook (PAO) for 2022-24 and our recent sector reports highlighted the
need to accelerate maintenance and production enhancement capex, as it is increasingly
critical for Petronas to ramp up volumes to fulfil customer demand for energy security.
Despite activities remaining slow in early-22, project tenders for such works have intensified,
and Uzma is one of the clear beneficiaries given its service offerings. For example, Velesto
Energy (HOLD/ Target: RM0.12) is stepping up on its HWU bids as it sees greater
opportunities to improve HWU utilisation. Nevertheless, any new contract award may still be
slow and not likely reflected in the FY22 horizon.
• Solar projects snapshot. About 27% of the RM0.9b orderbook for solar projects are under
the Engineering, Construction and Procurement (EPC) scope of works. Based on this,
Uzma’s solar unit may potentially recognise RM270m in revenue for FY23. Uzma has
ownership of 89MW of solar capacities, comprising its Large Scale Solar (LSS) 4 project
(50MW), 9MW for Net Energy Metering (NEM) works (recently secured 5MW from Sime
Darby), and another 30MW solar farm for a “Client N” by way of EPC involvement. Uzma
has “ownership” for this solar project as the EPC payment will be deferred and paid
throughout the power purchase agreement (PPA) period.
STOCK IMPACT
• A bumpy ride to reach long-term solar targets. Solar is expected to be the key driver of
the non-O&G diversification, with potential revenue targets to hit RM0.5b in the near term (by
2025) driven by EPC, and long-term revenue base of >RM1b (beyond 2030), assuming
1.5GW of operated renewable capacities. This is positive for ESG, as very few O&G
players have laid out such roadmaps. However, the ride will be bumpy. Firstly, the deferred
EPC payments from “Client N” will increase working capital strain (receivables). Secondly,
the LSS4 winners will need to contend with uncertain solar panel costs, which surged since
the time of LSS4 bidding, while the timeline for project delivery is getting shorter before the
commercial operation dates (COD) of 2023-24.
• Uzma guided that solar panel costs had declined from peak levels. Although costs are still
above the original budget, project IRR can still be matched, depending on optimisation/value
engineering and the EPC income. Potentially, the government may allow COD deferment for
the LSS asset owners, presumably to wait for solar costs to normalise. If COD remains fixed,
there is the issue of longer delivery times due to supply chain disruptions. Purchase orders
(PO) for the smaller projects will need to be done by mid-22, while POs for larger (50MW)
capacities by late-22. We understand that the EPC for 50MW project will progress to the
construction phase soon, while for the 30MW project the land clearing will begin after the
Raya festive periods.
• May look at potential solar M&As. Uzma is still keen to bid for solar projects for the
upcoming LSS5 and beyond, as Malaysia has a large potential to have up to 270GW of solar
capacities. Uzma is also open to acquire brownfield projects from LSS1 or LSS2, whereby
the five-year moratorium has expired, with remaining PPA periods of 15 years. These are
estimated at capacities of about 370MW. The base and feed-in tariffs were more lucrative vs
the recent LSS, at RM0.40/kWh to RM0.90/kWh (granted, costs were very different). Given
its balance sheet, Uzma will need to be selective on the right pricing and projects, ie with
minimal legacy problems or technical setbacks that can be resolved. Assuming this, the M&A
of existing cash-generating assets may be a positive angle to accelerate Uzma’s non-O&G
returns and decarbonisation plans.
EARNINGS REVISION/RISK
• Adjust FY22F-24 earnings by 0/0/6%. We raised revenue forecasts for FY23/24 by 23-
28%, given that works for solar projects had started (minimal impact for FY22). On earnings,
we are still cautiously optimistic vs management’s expectation, given the risks mentioned
above that are applicable to all LSS4 projects. Uzma is still in an early learning curve and the
delivery is crucial until the projects reach COD.
VALUATION/RECOMMENDATION
• Maintain BUY with adjusted target price of RM0.56 (from RM0.57) based on an
unchanged valuation of 10x FY23F PE. Uzma is not only expected to benefit from better
O&G maintenance, it is among the better small-cap stocks in terms of its ESG agenda.
Although Uzma remains highly dependent on Petronas’ work orders, our valuation horizon
(at FY23) now factors some positives from the non-O&G diversification, but earnings delivery
will be its most crucial earnings re-rating factor for the stock. That said, its share price level is
trading at close to its five-year low, which we believe has priced most of the risks in. At this
price level, the stock can be attractive for investors who have a longer term view and
prepared for the near term volatilities.
• We ignore any DCF valuation of the solar projects, until clear earning delivery is proven.
Our rough back of envelope calculations suggest the 50MW LSS4 project may offer
RM0.14/share DCF upside once COD commences, based on IRR of 8%.