News

Uzma Bhd announced that its subsidiary, Uzma Engineering Sdn Bhd has received a letter of award from Petronas Carigali for the provision of drilling project management team for Petronas Management Unit (PMU) wells.

The contract period is for 1 year from 17 September 2013 to 16 September 2014 with an extension option for 1 year.

The contract is expects to contribute positively to FY2013 earnings.

Comments

We view the contract award positively and in line with our positive outlook on the company’s RM2bn tenderbook. The company share price has appreciated 11% since we upgrade our target price in report titled “Small but growing BIG” dated 15 Aug 2013, reflecting the strong earnings growth and optimism on Uzma’s tenderbook.

While no contract detail and values have been disclosed in the announcement, we understand the contract should involve well planning, cost accounting, west testing, operation supervision and contracting engineer for the drilling programs. Domestically, the number of drilling activities is set to increase given the ETP driven RM300bn capex spending to enhance exploration, EOR and marginal fields. Channel checks indicate the 22 rigs operating domestically in 2012 will rise to 38 by end of 2013. Hence, we believe Uzma is in an excellent position to benefit from more drilling project management contracts award.

Oil revenue remains 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 the main beneficiaries as its propriety product - UzmAPRES is designed to help clients boost production without much capex.

Given Uzma’s experience and knowledge on full field review and reservoir study, we do not rule out the 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 of more than RM2bn is expect to sustain earning growth going forward (31% CAGR from 2012-2015). Uzma is one of our top pick in the O&G small cap universe given its strong growth prospect.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

Unchanged.

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 maintained our BUY call with an unchanged TP of RM4.85 based on a unchanged 14x FY14 EPS of 34.6 sen.

Source: Hong Leong Investment Bank Research - 14 Oct 2013