We are positive on the contract win as it will help to improve the overall utilisation of its HWUs. Moving forward, UZMA is likely to benefit from the stabilisation of oil prices, which will entice oil majors to roll out more maintenance jobs. However, we keep our MARKET PERFORM call on the stock with an unchanged TP of RM1.79 pegged to 1.1x FY17E PBV as the positives could have priced in.

9 months HWU contract. Yesterday, UZMA announced that it has received approval from LUNDIN Malaysia B.V. (Lundin) for a press release in relation to the award to Uzma Engineering Sdn. Bhd., a wholly-owned subsidiary for a contract for the provision of Hydraulic Workover Unit (HWU) services. The contract will run for a duration of nine months for HWU services at the Bertam field, on the east coast of Peninsular Malaysia.

Unknown contract value. This is the first HWU contract secured from Lundin and we are positive on the contract win as it will help to improve the overall utilisation of its HWUs. Recall that UZMA has achieved utilization of 50-60% for its HWUs in 9M16 and the company is targeting utilization of 60-70% in FY17. However, the contract value is uncertain at this juncture depending on work orders to be issued from time to time when services are required and the service rates are not explicitly laid out.

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 bbls 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. Despite no firm value from contract, we make no changes to our earnings forecast as we have factored in 60% utilisation assumption for its HWU segment. 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. 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. All in, we maintain our MARKET PERFORM call with unchanged TP of RM1.79 pegged to 1.1x 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 - 17 Feb 2017