News  Yesterday, Uzma Berhad (UZMA) and its partner EQ Petroleum Developments Malaysia S/B announced that they have signed a Small Field Risk Service Contract (SFRSC) with Petroliam Nasional Berhad

(PETRONAS’) to carry out the development and production of petroleum from the Tanjung Baram Fields for a period of nine years.

 The development phase of the entire SFRSC is expected to cost USD100m (RM325m) and first oil is anticipated in 2015.

 EQ Petroleum Developments Malaysia Sdn Bhd has a 70%-stake whilst Uzma has 30% in the venture, respectively.

Comments  We were not surprised by the win; as it is an open secret that UZMA has been bidding for a RSC since last year.

 This project would demand an equity of RM19.5m and result in gross debts of RM78m for the company.

 However, the investment cost would likely be covered by the proceeds from the proposed rights issuance (min-max gross proceeds of RM50.4m-99m). The rights issuance exercise is yet to be completed.

 Assuming a 80:20 equity:debt ratio; cost of debt of 6% and IRR of 15% (assumed based on the historical average rates guided by other marginal projects), we believe UZMA’s 30% stake will yield accretive earnings

of RM5.2m in FY15.

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.

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

Forecast  As the company expects for first-oil by FY15, we incorporate the RSC earnings to our forecasts, which have resulted in a 9.5% increase in our FY15 net profit forecasts.

Rating Maintain OUTPERFORM

Valuation  Our new TP is RM7.30 is based on an unchanged targeted FY15 PER of 16x. Our PER is justifiable given that the stock has successfully moved up the value chain instead of just being a service provider; and as its share base is pretty illiquid, the share price gains can be significant.

 Ex-rights, in a maximum scenario, our TP would be RM3.78, versus ex-rights share price of RM3.58.

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

Risks to Our Call    (i) Lower-than-expected margins and O&G activities; and (ii) delay in first-oil of the RSC.

Source: Kenanga