We returned from a recent meeting with UZMA’s management with a clearer view on its various business segments. FY16 earnings will be fuelled by maiden contribution from Tanjong Baram RSC and D18 water injection facility project while the Geoscience and Petroleum Engineering (GPE) team remains busy with brownfield studies jobs secured from oil majors. Having said that, we believe the overall oilfield services will continue to face margin pressure amidst the sector-wide slowdown. Therefore, we reduce our FY16E earnings by 3.4% to RM56.4m assuming lower margin for its Drilling and Well Services (DWS) segment. Despite the earnings adjustment, we upgrade the stock to MARKET PERFORM with a lower target price of RM1.71 pegged to 8.0x CY16 PER as we believe the price correction in the past three months has adequately priced in the earnings risk.

 

D18 water injection facility project on track but anticipating lower margin. We expect the revenue to kick in earliest 2Q16 should the mobilisation and HUC works are carried out smoothly. To recap, the project will require initial CAPEX of USD65-70m and is estimated to generate a daily income of RM200k for five years. As the income is denominated in Ringgit, the profitability of the project is reduced owing to the weakening of Ringgit against USD from the tender and negotiation period to contract award date. Hence, UZMA is trying to negotiate with Petronas to revise the daily income to factor in currency rate differential.

 

Maiden full-year earnings contribution from Tanjong Baram RSC in FY16. According to Petronas’s announcement in January this year, the Tanjong Baram oil field has started oil production on Aug 18, 2015 and is estimated to produce an average of 2,000bbl/day. We are guided that earnings contribution will only come in 1Q16 once billing is done. Meanwhile, we believe the estimated capex reimbursement period is prolonged to more than three years but still sufficient to cover the loan repayment at this oil price level.

 

GPE division remains occupied but oilfield manpower business affected. Management guided that the GPE segment performed better than expected in FY15 as compared to the previous downcycle back in 2008. This is largely attributable to clients continuing their brownfield reservoir studies so that they are ready to proceed to development phase once the oil prices recover to an economically feasible level. On the flipside, being one of the professional manpower suppliers, UZMA experienced significantly slowdown in this business division given that most firms, especially in the exploration and development segment are trimming their workforce to be more cost effective.

 

In talks to supply more UZMAPRES. UZMA is looking to supply three additional UZMAPRES (an idle well revival solution through pressure reduction) with some modifications in order to enhance the well production at a lower cost at earliest in 2H16. Currently, there are 10 units of UZMAPRES and all of them are contracted out. We have yet to factor this into our current forecasts as we deem discussion is still at preliminary stage. Should the company succeed in bagging new contracts, we estimate each additional UZMAPRES unit could at least contribute a monthly income of RM500k.

 

Upgrade to MARKET PERFORM. We cut our FY16E forecast by 3.4% to RM56.4m assuming: (i) lower margin from DWS segment, and (ii) lower contribution from manpower business in view of margin compression risk to persist. As a result, our TP is reduced to RM1.71 from RM1.77 pegging to an unchanged 8.0x CY16 PER. Despite the earnings adjustment, we upgrade the stock to MARKET PERFORM with a lower target price of RM1.70 as we believe the price correction in the past three months has adequately priced in the earnings risk.