Uzma secured a 5-year umbrella contract for the provision of drilling fluids and associated services, starting from 30 May 2018. While we are positive on the contract announcement showcasing its ability to expand product offerings, we believe the earnings impact would not be significant given that Uzma has yet to establish its track record in this space. With no changes in our estimates, we keep HOLD call on the stock with unchanged TP of RM1.04 (10x FY19 P/E).

NEWSBREAK

Uzma had obtained the approval from Petronas Carigali to announce the award of an umbrella contract for the provision of drilling fluids and associated services for Petroleum Arrangement Contractors (PACs). The tenure of the umbrella contract is 5 years, starting from 30 May 2018.

HLIB’s VIEW

New product & services offering. We are positive on the contract announcement as this is a new market for Uzma, demonstrating its capability to widen its product and services offerings. We suspect other shortlisted players would be Scomi Energy Services Bhd, an experienced local drilling fluids provider as well as other foreign players. Thus, Uzma would need to compete with other shortlisted player for the actual work orders when services are required.

Waiting to establish its track record. Despite drilling activities are expected to pick up in Aug, as evident by the mobilisation of Velesto’s jack-up rigs, we were guided that Uzma has yet to receive any work orders or tenders for this contract, suggesting that such jobs could have been awarded earlier on. Therefore, we believe any potential work orders could only be in earliest by end of the year. Furthermore, we reckon that the quantum of the job would be relatively smaller given that Uzma is new in the provision of drilling fluids and has yet to establish its track record.

Forecast. Making reference to the closest peer in this space, Scomi Energy which suffered operating losses for its drilling segment (integrated drilling fluids, drilling waste management solutions and production) in its latest quarterly results, the EBIT margins for such contract, in our view, could be rather competitive, estimated at 5- 10% (vs our assumed margin of 12-14%). No changes to our forecasts as we do not expect significant contract win from this umbrella contract at least in the near term. Reiterate HOLD, TP maintained at RM1.04 with unchanged TP of RM1.04 pegged to unchanged FY19 PER of 10x.

Source: Hong Leong Investment Bank Research - 26 Jul 2018