Results

Inline: 1H13 PATAMI increased 78% yoy to RM17.9m, making up 51% of HLIB and consensus full-year estimates.

Highlights

Strong 1H13 earnings growth due to the roll out of UzmAPRES units 8 in Feb 13, revenue recognition of the 5 year RM350m well testing contract, higher contribution from the supply chemical services and additional contributions under JCE level of 30% SPV (provides well-pumping, cementing and coil-tubing service). QoQ EBIT margin fell from 13.3% to 10.7% due to higher administration and operating expenses.

We also gather from management that the new version of UzmAPRES, which is smaller in size, is ready to be released. Given its relative compact and smaller size, margin will improve due to cost reduction as less steel structure will be used.

The recent Fitch’s downgrade on Petronas’s long term local currency issuer default rating (IDR) to negative has spurred concerned on oil production. We understand that oil revenue remain vital and form major part of government revenue. Hence, one of the best solutions to increase oil production is through Enhance Oil Recovery (EOR). Uzma stand out as main beneficiary as its propriety product - UzmAPRES is designed to help clients boost production without much capex.

Given Uzma’s experience on full field review and reservoir study, we do not rule out any possibility that Uzma might secure a marginal field contract. The company can leverage on its expertise in geoscience and reservoir engineering to increase the chance of winning. Any marginal field contract win will re-rate the stock and transform the company into an E&P player.

Total latest orderbook of RM1.35bn (~4.7x FY12 revenue) with tenderbook more than RM1.5bn is expect to sustain earning growth going forward (31% CAGR from 2012-2015). Uzma is our top pick in O&G small cap universe given its strong growth prospect.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

We are too conservative on our FY14 and FY15 assumptions and forecasts previously. Hence, FY14 and FY15 EPS increased by 13% and 15% respectively which will be driven by i) additional units of UzmAPRES deploy in local and overseas and ii) earning contribution from JV entity (Setegap Ventures Petroleum – well pumping cementing and coil tubing services).

Rating

BUY

Positives –

• Direct exposure to EOR and exploration spending.
• Room to grow.

Negatives –

• Small cap with low liquidity.
• Earnings strength is unproven.

Valuation

We raised our TP from RM3.98 to RM4.85 based on a higher P/E multiple of 14x (previously 13x) and higher FY14 EPS of 34.6 sen to reflect the strong earnings growth and optimism on Uzma’s tenderbook.

Source: Hong Leong Investment Bank Research - 16 Aug 2013