News

Uzma Bhd announced that its subsidiary Malaysian Energy Chemical & Services Sdn Bhd (MECAS) has received a letter of award for the provision of oilfield chemicals and associated services by Exxon Mobil Exploration and Production Malaysia.

The contract duration is 5 years with an extension of 2 years, starting from 1 Apr 2013.

The contract value for the first 5 year period is RM238m.

Comment

We view the contract award positively and in line with our positive outlook on the company’s RM1.5bn tenderbook. Recall that in our recent sector report dated 15 Apr 13, we have upgraded Uzma’s P/E valuation to 12x (previously 10x) and RM2.64 target price (previously RM2.10), to reflect our optimism on Uzma’s tenderbook. This contract confirms our position and this win increases Uzma’s orderbook by circa 24% to RM1.2bn or 4x its FY12 revenue.

Speed of contract drawdown (for this contract and the previous RM62m contract report dated 7 Aug 2012) is in ExxonMobil’s hands and is depended on ever changing knowledge of well characteristics which are not within either companies’ control. However, after contract recognition from last year, we now feel comfortable including both contracts and raise our forecasts.

We maintain our investment case that Uzma is a unique direct proxy to Petronas’ Exploration (through Manpower Studies and Wireline) and enhanced oil recovery (through the UzmaPress and Chemicals) spending which makes up part of the RM310bn Capex spending program.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

FY13 and 14 EPS increased by 17% to 24.6 and 24.7 sen / share.

Rating

BUY

• Positives –
  • Earnings inflection
  • Direct exposure to EOR and exploration spending.
  • Room to grow
• Negatives –
  • Small cap with low liquidity.
  • Earnings strength is unproven.

Valuation

We maintain our BUY call and increase our TP to RM2.72 (previously RM2.64) based on higher FY14 EPS of 24.7 but a lower 11x (previously 12x) multiple. We decrease our multiple to reflect a lower tender book (which normally act as price catalyst when won), now circa RM1.25bn.

Source: Hong Leong Investment Bank Research - 22 Apr 2013