Highlight

We attended Uzma analyst briefing yesterday which was hosted by CEO Dato’ Kamarul, after the recent award of Tanjung Baram RSC contract to its 30%-owned JV.

Total latest orderbook of RM1.8bn (~4.5x FY13 revenue) with tenderbook of RM2.8bn is expected to sustain earning growth going forward.

Management shares its long term strategy to further grow the business through: i) expanding product range; ii) merger and acquisition; and iii) oversea expansion. Potential oversea markets are Middle East, Bangkok and Jakarta. New products to focus are water solution, idle well solution, drilling project management and seismic processing.

The company is in the midst of acquiring two potential companies related to chemical and well services with one of the acquisitions to materialise by end of 2Q14. We understand the acquisition will be synergy to current business.

Tanjung Baram is different as compare to other marginal oilfield as it is a proven oilfield and tests showed well flow of oil. This will help to lower the project risk. First oil is anticipated to occur within 11 months which will be around Feb 15. We understand that substantial portion of the US$100m development cost by the JV will be contracted to Uzma.

Comment

We came away from the meeting feeling positive given the company’s long term strategy to pursue growth with enormous opportunity in providing oilfield services.

We estimate the RSC project will require equity funding of around RM30m for Uzma’s stake of x% (assume debt financing of 70%), which will be financed by the recent proposed rights issue of RM90m. We believe the remaining RM60m from the fund raising exercise will be utilized for acquisition(s). To note, we have factored in a conservative 6% interest earned on the remaining RM60m fund.

In addition, we do not ruled out the possibility of Uzma wining other RSC contract in future given their experience and knowledge on full field review and reservoir study. Oil revenue remains vital and forms major part of government revenue. Hence, one of the best solutions to increase oil production is through EOR. Uzma stands out as the main beneficiary as its proprietary product, UzmAPRES, is designed to boost production with minimal capex.

Risks

Delay in contract disbursement, execution risk.

Forecasts

We raised our FY14 and FY15 earnings by 6% and 5% respectively after take into account mobilisation of contract to Uzma for the RSC contract.

Rating

BUY

Positives –Direct exposure to EOR and exploration spending.

Negatives – Small cap with low liquidity.

Valuation

Given the recent share price weakness, we upgraded our rating on the stock from HOLD to BUY with TP raised from RM6.93 to RM7.30 (post earnings upgrade) based on unchanged 16x FY15 EPS of 45.7 sen/share.

Post rights issue, the ex-share price and ex-TP will be adjusted to RM3.34 and RM3.84 respectively.

Source: Hong Leong Investment Bank Research - 17 Apr 2014