We are positive on the contracts win as it shows UZMA’s ability to expand its product offerings to areas traditionally dominated by foreign players. While keeping our earnings estimates, we upgrade the stock to OUTPERFORM call with an unchanged TP of RM1.65 peg to 1.0x FY19E PBV premising on its innovative solution offerings and lower contract delay risk buoyed by stronger oil prices.

Secured 3 umbrella contracts. Yesterday, UZMA received approval from PETRONAS Carigali Sdn. Bhd. (PCSB) to announce that the award of three umbrella contracts for the provision of electrical submersible pump (ESP) and services for PCSB. These contracts involve: (i) the supply of jointed tubing ESP and the deployments, (ii) supply of coiled tubing ESP and the deployments as well as (iii) surveillance, monitoring and maintenance of ESP. Each umbrella contract will run for a duration of three years from 20 November 2017 to19 November 2020 with a 1-year extension option.

Potentially complement other businesses. We are positive on this first contract for CY18 as these ESP-related contracts secured by UZMA are not very common in Malaysia, being dominated by established foreign players. Furthermore, the provision of maintenance of ESP services potentially complements its wireline and HWU businesses. That said, there is no firm value for these umbrella contracts as it depends on the work orders issued by PCSB. Time lines of work order and service rates are not explicitly laid out, but we expect the contract to pick up in 2QCY18 post monsoon season.

No changes to our earnings forecast. As no firm contract value was provided, we make no changes to our earnings forecasts. We believe such contract could fetch EBIT margins ranging from 10-20% depending on the work scope and complexity of the jobs.

Upgrade to OUTPERFORM. UZMA is still actively tendering new jobs amounting to RM7.0b while having a sizeable order-book of RM2.0b in hand. With the anticipation of oil prices stabilising above USD55/bbl in CY18, we believe this will provide sufficient comfort for Petronas to execute the contracts that have been awarded lately and thus minimising the risk of delay in work orders. Thus, we upgraded the stock to OUTPERFORM call with unchanged TP of RM1.65 pegged to unchanged FY19E 1.0x PBV premising on its ability to innovate multiple solutions to oil majors amidst a challenging environment. Such valuation is equivalent to -1.0SD over a 5-year mean. Our TP also implied a FY19E PER of 15.6x which is at its 5-year average 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 - 10 Jan 2018