Results

Inline: 9M13 PATAMI increased 71% yoy to RM27m, making up 77% and 76% of HLIB and consensus full-year estimates.

Deviation

Largely in line.

Dividend

None.

Highlights

Uzma registered strong 9M13 earnings growth due to increasing UzmAPRES units, higher revenue recognition from Petronas’ well testing project, integrated water injection studies contract and higher contribution from the provision of oilfield chemicals and associate services.

QoQ PBT margin fell from 12.2% to 12% due to lower contribution from associate. We expect margin to improve going forward due to its newly released version of UzmAPRES, which is smaller in size with less steel structure or lower cost per unit.

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 chances of winning.

If it is successful in winning a RSC contract and assuming : i) project capex of RM200m; ii) 30% stake interest; iii) debt financing ratio of 70% and; iv) project IRR of 30%, our FY15 earning forecast would be boosted by 27% to RM65m. 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 TP raised from RM4.85 to RM5.20 based on a higher FY14 P/E multiple of 15x (previously 14x, to reflect the potential of securing a RSC contract and optimism on Uzma’s RM2bn tenderbook).

Source: Hong Leong Investment Bank Research- 27 Nov 2013