News  Yesterday, Uzma Bhd (UZMA) announced that it is proposing to acquire the entire equity interest in MMSVS Group Limited (MMSVS) for an indicative purchase consideration of USD29.7m (RM95.3m).

 The principal activities of MMSVS are the provision of services in relation to the repair and maintenance of exploratory and production wells utilising Hydraulic Workover Units (HWU). MMSVS owns seven modern HWUs and 1 Truck Mounted Service Rig that can operate onshore and offshore.

 There are several tranches of payments (please refer to Table below); with final payment being no later than Mar 2016 and contingent on an agreed-upon aggregate sales guarantee for 2014 (USD18.2m, c.RM58.60m) and 2015 (USD22.6m, c.RM72.7m).

Comments  We were pleasantly surprised by the acquisition.

 Firstly, we think that the acquisition price is fair at FY14 EV/EBITDA of 5.5x (versus the average FY14 EV/EBITDA of c.11-12x that the Malaysian offshore owners under our coverage trade at). Secondly, we believe these assets are a good fit for UZMA’s drilling and well services division and will spearhead further vertical sector growth given they are niche oriented.

 The target company also spent 8-year expanding its Southeast Asia operations, which means that in one sweep, UZMA not only acquires a company with proven skillsets; it will also gain a regional footprint in Southeast Asia (currently its is quite domestic-driven).

 Lastly we like that the last payment is pegged to the aggregate sales guarantees for FY14-15, as it safeguards UZMA’s interests.

 UZMA will not have an issue to settle the initial payment of USD1.5m (RM4.7m), but we believe that it might revert toborrowings to fund the subsequent payments. The company is net cash (3 sen/share) for now. In any case, the upcoming rights issuance (which will raise gross proceeds of RM50.4m-RM99M) can also be able to be utilised for the acquisition.

Outlook  We understand that this acquisition will still have to pass through an Extraordinary General Meeting (EGM).

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

 Uzma also has a RSC that will spearhead future earnings growths with further game-changers being successful participation in any of the Chemical Enhanced Oil Recovery (CEOR) projects.

Forecast  We maintain our forecasts for now pending the successful completion of this acquisition.

Rating Maintain OUTPERFORM

Valuation  We maintain our TP of RM7.30, which is based on an unchanged targeted FY15 PER of 16x. Our PER is justifiable given that it 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.

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

Source: Kenanga