News  Last week, Uzma Bhd (UZMA) announced that it is looking to acquire an additional 19% of current associate (currently 30.02% owned) Setegap Ventures (SVP), thus bringing its total equity stake to 49%.

 The purchase consideration for the stake is RM28.5m to be satisfied via a cash payment of RM17m and 5.35m new Uzma shares.

 The proposed acquisition is expected to be completed by 1Q15.

Comments  We were not surprised by this additional acquisition as management had earlier guided that they were looking to complete one more M&A within the year.

 Whilst the purchase consideration translates to a PER of 9x (based on SVP’s annualised net profit of RM16.4m for FY14) and is slightly above the last done acquisition PER of 6.3x for its last M&A for Premier Enterprise Corporation (M) Sdn Bhd (PEC) performed in Jul-14; we believe there are long-term benefits in increasing its stake as SVP was awarded a 5-year Vendor Development Programme (VDP) status for the provision of its Coiled Tubing Services (CTU) services for PETRONAS Carigali Sdn Bhd’s East Malaysia operations in Nov-14. Thus, this M&A solidifies UZMA’s presence in the well intervention scene.

 As the government focuses on maintaining existing production, such services would be advantageous to UZMA.

Outlook  The acquisition will expand UZMA’s share cap by 2% to 269.4m.

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

Rating Upgrade to OUTPERFORM; from MARKET PERFORM

Valuation  In lieu of the falling crude oil prices; we foresee greater de-rating on the sector’s valuations.

 As such we reduce our PER for the stock to 9x (versus 12x previously).

 The change has resulted a decline in our TP to RM2.02 (from RM2.70 previously).

 Given that UZMA’s share price has fallen significantly in the last month and we still view it as one of the “safer bets” within the oil and gas sector given its services, which are relatively opex in nature, we upgrade our call on the stock to OUTPERFORM (from MARKET PERFORM previously).

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