UZMA is acquiring an additional 15% stake in Setegap Ventures Petroleum for RM36m, bringing its total stake to 64%. The acquisition implies valuations of 14x PER, and is 4-10% earnings accretive to FY19-20. While we are positive on the acquisition due to synergistic benefits, acceptable valuations and positive earnings impact, we downgrade our call to MP due to earnings delivery concerns and strong share price rebound; despite raising its TP to RM0.81.

Increased stake in Setegap Ventures Petroleum. Yesterday, UZMA announced a proposed acquisition of an additional 15% equity interest in Setegap Ventures Petroleum Sdn Bhd (SVP) for RM36m cash, increasing its stake in the company to a total of 64%, from 49% currently. SVP is principally involved in the provision of support services to the oil and gas industry, such as well pumping and coil tubing. Such services are complementary to the existing services offering of Uzma, such as geoscience and reservoir engineering, drilling as well as project and operation services. The proposed acquisition is expected to be completed by 1QCY19.

Earnings contribution and acquisition valuation. Taking into account UZMA’s current 49% stake, SVP had contributed to c.30% of its 1Q19 reported earnings. Meanwhile, annualising SVP’s latest 1Q19 quarterly reported earnings suggest an acquisition valuation of roughly 14x PER, with the additional 15% stake estimated to contribute roughly RM1-3m to UZMA’s FY19-20E earnings (representing roughly 4-10%). No significant balance sheet impact from the acquisition, with net- gearing of 0.8x as at end-1Q19. Overall, we are positive on the increased stake in SVP as: (i) we find the acquisition valuation of c.14x PER to be acceptable, in-line with the O&G sector average, (ii) the acquisition will have a positive impact towards UZMA’s earnings, and (iii) the increased stake would allow UZMA greater management control over SVP’s business and operations, which ultimately benefits UZMA’s value chain of service offerings.

Look towards possible earnings recovery in 2Q19. To recap, UZMA posted a set of disastrously disappointing 1Q19 results, registering only RM0.5m core net profit due to operational interruptions during the quarter, particularly in its D18 project and Uzmapress units. That said, we look forward to a possible earnings recovery in the upcoming 2Q19 results (expected release next month), with management guiding that they are currently on track of resuming operations for the aforementioned. While the SVP acquisitions are indeed expected to have a positive earnings impact, we made no changes to our FY19-20E earnings, opting a conservative stance, with our FY20E earnings already implying a 12% earnings growth.

Downgrade to MARKET PERFORM despite a higher TP of RM0.81 (from RM0.65 previously) pegged to 0.5x PBV. While we identified an attractive entry opportunity previously, seeing some reasonable upside even after pricing it to floor valuations in our 1Q19 strategy report, recent share price recovery (+32% YTD) coupled with slight concerns in its earnings delivery have prompted us to downgrade our call to MARKET PERFORM for now. Our ascribed valuations of 0.5x PBV is close to -1.5SD from its 5-year average. Should earnings delivery be restored, we see a potential re-rating range of around 0.6-0.7x (implying TP of RM1.00-1.15).

Risks to our call: (i) stronger-than-expected work orders, (ii) stronger- than-anticipated margins, and (iii) stronger-than-expected contracts flow.

Source: Kenanga Research - 30 Jan 2019