Uzma Bhd (UZMA) has been keeping busy; within 1H14, it has: (i) raised RM99m through a rights issuance of up to 132m shares at RM0.75/share in Mar-14, (ii) won the Tanjung Baram Small Field Risk Service Contract (SFRSC) via a consortium in Mar-14, and (iii) proposed the acquisition of Thai-based MMSVS Group Limited (MMSVS) that provides Hydraulic Workover Unit (HWU) services for USD29.7m (RM96.5m) in May-14. Overall, we are positive on these moves as they strengthened UZMA’s balance sheet, gained UZMA entrance into the RSC space, and enhanced the drilling and well services division. Even more interesting is that UZMA is hoping to close two more M&As within the year, pointing to more excitement in 2H14. We have raised our FY14-15 net profit estimates by 4.2-17.7%. Our TP is also revised to RM4.30 (from expected ex-rights price of RM3.78 previously) based on an-unchanged 16x CY15 PER. UZMA remains a favourite for unconventional production enhancement play and, in our view, is one of the main beneficiaries for upcoming Chemical Enhance Oil Recovery (CEOR) plays which may emerge within end 3Q14-4Q14.

Proposed rights issuance goes ex; raises share base to 264m (from 132m shares). UZMA’s new rights went ex on the 26th of June, raising gross proceeds of RM99m (132m shares at an issue price of RM0.75/share). The majority of these proceeds will go to capex (c.RM78m (~78.7%) of which UZMA is not short of deployment options given they are: (i) undertaking the SFRSC, and (ii) embarking on the MMSVS acquisition; and (iii) looking to complete at least 2 more M&As within the year.

Update on Tanjung Baram SFRSC. The proposed development concept for the SFRSC will involve a jack-up rig for drilling; then the installation of a wellhead platform which will be tied in to the West Lutong field using flexible pipes (versus conventional pipelines for cost advantages). Overall project capex is estimated to be USD100m (UZMA’s portion is estimated to only be c.USD30m). For now, the consortium is finalising the subsurface studies and drilling programme with aims to kick-start drilling by end 3Q14- to-4Q14. First oil is targeted in 2Q15, but UZMA hopes to secure spin-off services before that. We understand that management looks to fund 70% of its USD30m (~RM100m) portion via debt.

Thai-acquisition yields immediate earnings accretion. The deal has yet to go through the Extraordinary General Meeting (EGM), but we will be surprised with a “no-go” as shareholders are likely to be receptive given: (i) the immediate earnings accretion (expected 6-months of contribution in FY14); (ii) the aggregate sales guarantees for FY14-15 of USD18.2m (c.RM58.6m) and USD22.6m (c.RM72.7m) from MMSVS, thus safeguarding UZMA’s interests; and (iii) the enhanced geographical reach from the acquisition. MMSVS’s fleet consists of seven HWUs and one Truck Mounted Service Rig that can work onshore and offshore. These assets are purportedly on the average below 5-years; hence are considered pretty young. As mentioned above, the purchase is likely to be mainly funded via debt (c.70% (~USD20.9m). Assuming a 10% net profit margin, this would yield FY14-15 net profit of c.RM3m and RM7.4m.

Raising FY14-15 net profit forecasts. We have fine-tuned our estimates to incorporate the financial impact from the rights issuance, borrowings for the SFRSC and the potential earnings accretion from the MMSVS acquisition. Our tweaks lead to our FY14-15 net profit estimates increasing by 4.2-17.7%.

More M&As on the horizon? Market talks are that the company is still searching for acquisition prospects and whilst there have been no leads as yet; targets, in our view, are likely to be within the chemical, well services and brownfield rejuvenation segments given UZMA hopes to build a name in unconventional production enhancement and as is gunning for upcoming Chemical Enhance Oil Recovery (CEOR) plays, which may emerge in within end 3Q14-4Q14.

Maintain Outperform. Our net profit revisions lift our CY15 EPS to 26.8 sen (from the estimated 23.6sen previously) thus leading to our TP increasing to RM4.30 (from expected ex-rights price of RM3.78 previously) based on an-unchanged 16x CY15 PER. Whilst the PER ascribed is higher than its historical forward PER of c.11x, it is justifiable given that the stock has successfully moved up the value chain instead of just being a oilfield service provider.

Risks to our view. (i) Lower-than-expected margins and O&G activities, (ii) delay in first-oil of the RSC, and (iii) no-go for MMSVS acquisition.

Source: Kenanga