We visited MMSVS’s (wholly-owned subsidiary of UZMA) yard in Phitsunalok province of Thailand recently to gain a better understanding of its Hydraulic Workover Unit (HWU)’s role and function in the oil and gas industry. While HWU is less common in Malaysia, we learnt that they are widely used in Thailand for well intervention and troubleshooting due to their relatively affordable costs. The visit made it clearer to us that the acquisition of MMSVS is strategic to UZMA as it provides access to the South-East Asian well maintenance market in the future. The Malaysian HWU market remains largely untapped and the group believes that it could introduce HWU as a better well maintenance solution to the market, which provides ample long-term opportunities for the group. We have increased our target CY16 PER to 11.0x from 10.0x previously due to better growth prospect and robust production expected from its Tanjung Baram RSC. As a result, our TP is increased to RM2.58 with MARKET PERFORM call maintained.

Hydraulic Workover Unit, low cost oil field maintenance tool. Unlike Malaysia, the usage of HWU for the maintenance and production enhancement of oil fields are more common in Thailand as it is regarded as the lower cost solution for the oil operators. It is used for the snubbing process whereby it is a type of well intervention. Unlike wireline and coiled tubing, the pipe is not spooled off a drum but made up and broken up while running in and pulling out. This is able to be performed without killing off the well while offering strength and durability.

HWU used for onshore mainly in Thailand. Currently, most of the HWUs owned by MMSVS are used for onshore oilfields, which are a large market in the country given that in Phitsanulok province alone, there are c.2000 onshore wells drilled with field life ranging from 10-20 years, which required maintenance to maintain and boost oil production. MMSVS has served oil giants operating in the area for >10 years with PTTEP, Thailand NOC and Shell under Mr. Pornsak Visitpong, MMSVS’ previous owner and founder.

How MMSVS fit into UZMA’s bigger plans? To recap, UZMA has completed the acquisition of MMSVS for an aggregate consideration of USD29.7m in 23th July 2014. The acquisition of MMSVS is in line with the group’s strategy of expanding its service offerings in the Drilling Well Services division while giving the group a stronger footing in their expansion into the South-East Asia O&G market. To put that into perspective, our channel checks yield that currently only 2.0% of the fields in Malaysia are using HWUs for production enhancement and well intervention, possibly due to limited offerings of HWUs in the market with acceptable cost. Meanwhile, MMSVS is tendering for RM500m worth of projects, which point to potentially higher growth in the next 2-3 years. Besides, it plans to make its entire HWUs offshore ready by end of this year to capture a bigger HWU market in the region.

To offer better-spec HWUs with higher standardization. With the acquisition, UZMA aims to penetrate into the South-East Asia offshore market by offering higher specifications HWUs. The company will also consider to upgrade its current fleet of 9 HWUs (1 truck-mounted rig included) while standardizing its ancillary units (battery pack etc) to widen its client base and reduce downtime between mobilisation and demobilisation of assets. With design and fabrication capability in house and technical capabilities from its other divisions, we believe UZMA will be able to tap into the South- East Asia market in the long run while providing ample growth opportunities for the group.

Maintain MARKET PERFORM. While we are maintaining our earnings forecasts, we have decided to increase our target CY16 PER to 11.0x from 10.0x to reflect: (i) improved earnings growth potential with more resilient maintenance business, and (ii) promising prospect from its RSC, Tanjung Baram, which is awaiting oil production commencement soon. As a result, our TP is increased to RM2.58 from RM2.34. MARKET PERFORM call is maintained. In FY14, MMSVS contributed c.17.2% to the group EBIT. It is expected to contribute c. 27.0% of the group’s total EBIT in the next two years.

Source: Kenanga Research - 5 Jun 2015