Uzma has a firm RM1.4b orderbook on hand, with upside from umbrella contracts. Although the group anticipates a ramp-up in certain activities (with higher capex guidance), the high dependency on Petronas work orders means earnings visibility is still challenging. Despite higher oil prices, we prefer a wait-and-see approach until strong earnings catalysts become clear. Maintain HOLD, with an adjusted target price of RM1.15 (from RM1.46). Entry: RM0.90.

WHAT’S NEW

• RM1.4b firm orderbook excluding umbrella and call-out works. This is split between 60% for well solutions and 40% for production solutions and does not include the umbrella contracts that could be worth another RM1.4b. Based on Uzma’s several years of track record for recognising actual works from umbrella contracts, we believe it is reasonable for Uzma to recognise 30-40% of the umbrella contracts on hand to be converted into actual work orders. The guidance on orderbook is more conservative vs the orderbook run rate of >RM2b in the past, given the lack of visibility and certainty of schedules and actual activities from confirmed contracts.
• More umbrella contracts secured, despite slow activity. In tandem with our observation of the industry, management shared that up till May 18, a lot of bidding activities, work order requests and market surveys were carried out. However, clients advanced very few of the projects. Out of these bids and requests, Uzma had a high percentage of contract awards. The group continues to secure new umbrella contracts covering production and well solutions, though many of these contracts are meant to replace and replenish its existing jobs.
• Revenue exposure by client and geography. As Uzma’s services cater to well integration and production enhancement solutions, almost all of its contracts are tied to the clients’ development and production activities (minimal exploration stage). We estimate ~70% of the contracts exposure is predominantly towards local clients like Petronas, while its international revenue is at about 17%. Like most other service players, Uzma has high revenue exposure (>60% of existing local orderbook) to activities in the Sabah and Sarawak regions. We understand that locally, there is enough client demand that necessitates services from contractors, thus there is no more major industry-wide pressure on rate discounts. However, despite higher oil prices, it is still difficult and too early to assume that demand and work orders would improve from current levels. However, costs for manpower and equipment have been on an uptrend.

STOCK IMPACT

• Improving net gearing. After a sizable debt repayment (partly funded by the last private placement exercise in 2017), the group’s balance sheet has been improving with net gearing at 0.78x from >1x a year ago. The bulk of the borrowings are tied to the D18 water injection project (producing steady recurring income) and the Tanjung Baram RSC (risk is underwritten by Petronas). Excluding these two projects, net gearing is lean at only <0.3x. Another point to note is that while D18 is earning a yearly EBITDA of RM40m-45m and is already paring down the loan, the group had to occasionally incur extra working capital for equipment and supplies for the maintenance and operations of the platform.
• Potentially more capex in anticipation of ramp-up in new activities. In comparison to the RM26m capex incurred in the five quarters of FY18 (since Jan 17), management is guiding that future yearly capex allocation (including those of associates and JVs) can go up to RM80m. This is because the group needs to prepare and mobilise for new activities from its existing contracts, depending on timing and work flows. In 5QFY18 (ie 1Q CY18), the group incurred capex of RM12m. Nevertheless, we understand there is no more need for additional equity fund raising as the capex allocation will be supported by a mixture of debt and internal funds. Some of the activity and utilisation ramp-up is expected to come from hydraulic workover units and wirelines, for jobs like plug and abandonment services.

EARNINGS REVISION/RISK

• Amend FY18-20 earnings forecasts by -4%/-5%/-5%. There is no yoy comparison for the cumulative FY18 profit (18-month period), as the group changed its financial year-end from December to June. We have lowered our revenue assumptions as the group is slowly moving out of lower-margin projects. Although we are concerned about the higher cost structure, we believe the group strives to maintain strong margins and we forecast net core profit margins would remain steady at 8-9% in FY18-20 (FY16: 9.2%).
• Risks to our valuation and forecasts include: a) cost overruns, b) delayed revenue recognition from ongoing projects, and c) rate renegotiations.

VALUATION/RECOMMENDATION

• Adjust target price to RM1.15 (from RM1.46). Our target price is pegged to 10x FY19F PE (reduced from 12x FY19F P/E). Although our target price is at a discount to equity (0.8x P/B), the valuation is consistent with other asset-light small-cap O&G stocks like Deleum.
• Maintain HOLD. Even though Uzma is an outstanding service player in the provision of maintenance and production enhancement technology for oil majors, its high dependency on Petronas work orders makes it challenging to forecast the visibility of earnings moving forward. Even though share price had corrected to lower levels, we believe that without earnings visibility, fundamentals will not benefit materially from higher oil prices. We prefer a wait-and-see approach until a firmer guidance on activity and work order pick-up which would translate into stronger profit growth. Entry price: RM0.90.

SHARE PRICE CATALYST

Securing more contracts and better-than-expected earnings growth.

Source: UOB Kay Hian Research - 7 Jun 2018