We are positive on the contract win as it helps to improve the overall utilisation of its HWUs. No changes to our earnings forecasts as we have factored in utilisation assumptions of 50-60% for HWUs in FY18-19. All in, we maintain our OUTPERFORM call with an unchanged TP of RM1.65 pegged to 1.0x FY19E PBV premising on more contract wins backed by its innovative solution offerings amidst stable oil prices.

Second HWU umbrella contract. Yesterday, UZMA received approval from PETRONAS Carigali Sdn. Bhd. (PCSB) to announce the award of the umbrella contracts for the provision of 150K, 225K and 460K drilling of Hydraulic Workover Units (HWU). The umbrella contract will run for duration of three years from 6 February 2018 to 5 February 2021 with a 1-year extension option. Recall that UZMA has secured the first 3-year umbrella HWU contract for the provision of 340K and 460K HWUs in December last year, which was announced in January this year.

Unknown contract value. This is the third contract win for CY18 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 utilisation of c.40% for its HWUs in CY17 and is targeting utilisation of 60-70% in CY18. Currently, three out of ten HWUs are contracted in Thailand and another three are contracted in Malaysia. UZMA will earn either a standby rate or full rate depending on the amount of works given by clients. As for such umbrella contract, UZMA would need to compete with another shortlisted player, which we suspected is UMWOG (Not Rated) for the actual work orders when services are required. Thus, the contract value is uncertain at this juncture depending on work orders to be issued from time to time and the service rates are not explicitly laid out. We are guided that Petronas has yet to issue any work orders to UZMA for the first umbrella contract and UZMA could possibly start getting some works by 2QCY18.

No changes to our earnings forecast. As no firm contract value was provided, we make no changes to our earnings forecast as we have factored in 50-60% HWUs’ utilisation assumptions for FY18-19. We believe such contract could fetch EBIT margins ranging from 10-30% depending on the work scope and complexity of the jobs.

Retain OUTPERFORM. UZMA is still actively tendering for new jobs amounting to RM7.0b while having a sizeable order-book of RM1.8b- 1.9b in hand. With the anticipation of oil prices stabilising above USD60/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 maintain our OUTPERFORM call on the stock with unchanged TP of RM1.65 pegged to unchanged FY19E 1.0x PBV premised 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 - 2 Mar 2018