UZMA is acquiring an additional 22% equity interest in Setegap Ventures Petroleum for RM52.8m, bringing its total stake to 86%. Overall, we deem the acquisition to be fair, acknowledging its immediate earnings enhancement (~RM1.5m/year, or +4% of FY21E earnings), and acceptable acquisition valuation (11x PER), as well as complementing UZMA’s existing services offering. Maintain MP with TP of RM0.85.

Increases stake in Setegap Ventures Petroleum. UZMA announced that it is acquiring an additional 22% equity interest in Setegap Ventures Petroleum for a cash consideration of RM52.8m. The acquisition is expected to be completed within 1 month. Postacquisition, this will see UZMA’s equity interest in Setegap Ventures increasing from 64% to 86%.

Background: Setegap Ventures Petroleum is principally involved in the provision of support services to the oil and gas industry – e.g. well pumping and coil tubing.

Takeaways from the acquisition. This latest acquisition follows through on UZMA’s previous round of acquisition on Setegap Ventures of 15% back in Jan 2019, when UZMA increased its stake from 49% to 64% for RM36m, thereby giving UZMA the majority controlling stake as well as earnings consolidation. Overall, the increased stake would allow UZMA greater control, earnings contribution, as well as complementing existing services offering, such as in areas of geoscience and reservoir engineering, drilling as well as project and operations.

Based on FY19A accounts (Setegap Venture Petroleum’s FY19A PAT of RM21.3m) as well as a borrowing costs assumption of 6%, the additional 22% stake should have a net earnings contribution of roughly ~RM1.5m per year (or ~4% of FY21E earnings). The acquisition price implies valuation of 11x PER, which we deem to be as acceptable, and is also the same price paid for the earlier 15% acquisition. Overall, we deem the acquisition to be fair, seeing that it should immediately provide earnings enhancement. However, note that the acquisition would raise UZMA’s net-gearing level slightly to 1x, from currently 0.9x.

Maintain MARKET PERFORM, with unchanged TP of RM0.85, pegged to 0.5x PBV which is -1SD from its 12-month mean, and also implies a forward PER of c.9x. Opting for a more conservative stance, we made no changes to our FY20-21E numbers post-acquisition, pending its upcoming 2QFY20 results release later this month.

Risks to our call: (i) higher-than-expected margins, (ii) faster-thanexpected order-book recognition, (iii) slowdown in jobs flow among local oil and gas brownfields, and (iv) significant job wins of sizable value

Source: Kenanga Research - 6 Feb 2020