News  Yesterday, Uzma Bhd (UZMA) announced that it is proposing to acquire the entire equity interest in Premier Enterprise Corporation (M) Sdn Bhd (PEC), a company which trades oilfield chemicals and other commodities constitutes for RM18.6m.

 PEC is also entitled to an additional RM2.0m, upon the extension of ongoing chemical supplies contracts, which expire in Oct-15 and Jan-16.

 UZMA expects to complete the acquisition within a month via internally generated funds.

Comments  We are not surprised by this acquisition as management has guided that they are looking to complete at least 2 more M&As within the year.

 We are also positive as the M&A enhances UZMA’s oilfield chemical market share and its clientele base. Besides that we believe the acquisition is fair, at a PER of 6.3x based on implied annualised FY14 PAT of RM2.9m (PEC recorded a 10-month FY13 PAT of RM2.4m);

 PEC recorded historical FY11-FY14 PAT of RM1.3m-RM2.9m; hence assuming an average PAT of RM2m p.a. this would bump up our FY14-15 forecasts by 4.3% and 2.8%, respectively. Whilst this seems marginal to UZMA’s bottomline for now, we believe management’s end goal is the potential margin expansion for its chemical business once operating costs are optimised via economies-of-scale from combined operations.

 UZMA will have no issue in funding this acquisition as it has just completed a rights issuance that raise gross proceeds of RM99.0m.

Outlook  The acquisition is not subject to the approval of the shareholders of Uzma or any government authority; hence is expected to go forward smoothly.

Forecast  We maintain our forecasts for now pending management guidance as to future earnings.

Rating Maintain OUTPERFORM

Valuation  We maintain our TP of RM4.30, based on an unchanged FY15 PER target of 16x.

 Whilst our ascribed PER is higher than the historical forward PER of 11x, we think it is justifiable given that UZMA has successfully moved up the value chain.

Risks to Our Call

 (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