News  Yesterday, Uzma Berhad (UZMA) announced the following proposals:- (i) a renounceable rights issue to raise maximum gross proceeds up to RM99m and (ii) an increase in authorised share capital from RM100m to RM250m.

 The issue price of RM0.75 per Rights Share represents a discount of approximately 76.73% to the theoretical ex-right price (TERP) of UZMA shares of RM3.22, calculated based on the five (5)-day VWAP up to and including the LDP of RM5.69.

 The renounceable rights issue is on the basis of 1 Rights Share for every 1 existing Share held in UZMA at an entitlement date to be determined later.

 The exercise should be completed by 4Q14.

Comments  The proposed fund raising exercises are to strengthen UZMA’s group position, reduce gearing levels and raise funds for CAPEX and working capital. We suspect that the main capex could be for RSCs that the company has been gunning for.

 Based on the illustration by UZMA, in a maximum scenario the proposed renounceable rights issuance could: (i) lift UZMA’s share base by 132.0m shares (2x current share base) to 264.0m shares, and (ii) results in an EPS dilution of 48%, and (iii) reduce net gearing to 0.13x (from 0.26x).

 Overall, we are positive with the exercise as the company intends to utilize the funds for growth. We also believe that shareholders will subscribe to the rights issue given that it is priced at a steep discount to TERP.

Outlook  Orderbook stands at RM1.6b whilst bids are at RM2.6b.

 UZMA’s earnings are expected to grow steadily due to higher UzmaPres units and better wireline and well services take-up rates as Uzma continues to build up its track record in this space.

 Chances for RSC wins are strong given that Uzma was a participant in the early studies for some of the marginal fields, which give its in-depth knowledge. Assuming a win, we believe the company will have to raise funds as it is a large endeavour.

 Further game-changers are the successful participation in any of the Chemical Enhanced Oil Recovery (CEOR) projects.

Forecast  We maintain our earnings forecasts for now pending the completion of the corporate exercises.

Rating Upgrade to OUTPERFORM (from MARKET PERFORM)

Valuation  Our unchanged TP of RM6.67 is based on a targeted FY15 PER of 16x. Our PER of 16x is justifiable as we understand that it might be close to securing an RSC this year; which would lead to further share price re-ratings.

Stock is pretty illiquid hence gains can be significant. Exrights, in a maximum scenario, our TP would be RM3.47, versus ex-rights share price of RM3.26.

 The recent share price correction prompts an upgrade in our call to OUTPERFORM (from Market Perform).

Risks to Our Call Lower-than-expected margins and O&G activities.

Source: Kenanga