We are positive on this contract award as it marks the maiden Pan Malaysia contract secured by UZMA, which was previously dominated by established foreign players. However, we maintain our earnings estimates in the absence of any firm work orders at this juncture. All in, we keep the MARKET PERFORM call on the stock with higher TP of RM1.79 (from RM1.63 previously) pegged to 1.1x FY17E PBV.

Awarded 3+1+1 Umbrella Contract. Yesterday, UZMA announced that it has on 3 February 2017 received approval from Petronas for a press release in relation to the award from Petronas Carigali Sdn. Bhd. to Uzma Engineering Sdn. Bhd., a wholly-owned subsidiary for an umbrella contract for the provision of Electric Wireline Logging (EWL). The contract has a duration of three years, commencing from 1 December 2016 to 30 December 2019 with two extension options of one year each for Cased Hole Logging Services across the Pan Malaysia area.

New achievement for UZMA. We are positive on this contract award as it marks the maiden Pan Malaysia contract secured by UZMA, which was previously dominated by established foreign players. Given that it is an umbrella contract, we suppose that Petronas had shortlisted 5-6 licensed players which qualified for technical specifications. Time lines of work order and service rates are not explicitly laid out, but we expect the contract to pick up in 2Q17 post monsoon season.

4Q16 to be buoyed by D18 WIF project. Tanjong Baram RSC’s earnings contribution is expected to be minimal in FY16 as most cash received from barrels lifted are used to offset opex and recouping of capex. Meanwhile, we expect the D18 WIF project to contribute in 4Q16. Recall that UZMA secured this project with contract value of RM350-400m in July 2015 for duration of 5 years.

No changes to our earnings forecast. While UZMA has yet to secure any work orders at this juncture, we do not factor any earnings contribution from this contract. However, we believe such contract could fetch EBIT margins ranging from 10-30% depending on the work scope and complexity of the jobs.

Maintain MARKET PERFORM with higher TP of RM1.79. Despite facing margin corrosion pressure due to low offshore activities, we believe UZMA’s outlook will gradually recover given that higher crude prices will speed up capex reimbursement of its Tanjong Baram RSC and entice oil majors to roll out more maintenance jobs. Following that, we maintain our MARKET PERFORM call with higher TP of RM1.79 (from RM1.63 previously) pegged to 1.1x (from 1.0x) FY17E PBV which is equivalent to -1.0SD over the 5-year mean.

Risks to our call: (i) Weaker-than-expected recovery in O&G market, (ii) Slower-than-expected delivery in D18 Water Injection Project, and (iii) Lower-than-expected margins.

Source: Kenanga Research - 07 Feb 2017