News

To propose a renounceable right issue of up to 132m Right Shares on the basis of 1 Rights Share for every 1 existing shares.

The right issue price is RM0.75/share, representing a 77% discount to the theoretical ex-rights price (TERP) of RM3.26. The proposals are expected to be completed by 4Q14.

Highlights

We are positive on this exercise as it strengthens the balance sheet in order to finance expansion plan and improve liquidity. We believe the fund raised will be used for potential special project(s) such as marginal fields, enhance oil recovery and others.

Overall, FY15 EPS will be diluted by 45% from 38.5 sen/share to 21 sen/share (only factored in interest earned and without any contribution from new special projects). However, we believe the new potential special project(s) will mitigate or even offset the dilution from the cash call.

This exercise is expected to raise up to RM90m. Its net cash position will increase from RM3.5m to RM93.5m, further beef up its war chest for expansion.

We conservatively do not include the potential RSC award in our forecasts. Any marginal field contract win will re-rate the stock and transform the company into an E&P player.

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.

Total latest orderbook of RM1.6bn (~4x FY13 revenue) with tenderbook of RM2.6bn is expected to sustain earning growth going forward.

Risks

• Delays in contract disbursement.
• Execution risk.

Forecasts

Unchanged, pending conclusion of the rights issue and/or securing new special project(s).

Rating

HOLD

Positives –

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

Negatives –

• Small cap with low liquidity.

Valuation

We maintained our HOLD call with unchanged TP of RM6.16 based on a 16x FY15 EPS of 38.5 sen/share.

Post the exercise, the ex-share price and ex-target price will be adjusted to RM3.26 and RM3.48 respectively.

Source: Hong Leong Investment Bank Research - 19 Mar 2014