UZMA announced two new contracts - (i) umbrella well testing and tubing conveyed, and (ii) platform wells plug and abandonment, summing up to a total value of RM136m. We are positive on the contract wins, demonstrating UZMA’s expertise, expecting them to fetch low-to-mid teens operating margins. Upgrade to a trading “OUTPERFORM” call as we see value emerging given recent weak market sentiment.

Announces two contract wins. Yesterday, UZMA announced securing two new contract wins:- (i) Umbrella contract from Petronas Carigali, for the provision of well testing and tubing conveyed perforations for the Petroleum Arrangement Contractors (PACs). UZMA shall perform light weight well testing services, with duration from 15 Jan 2020 to 31 March 2021, or until completion of scope of works. The value of the work orders are approximately RM36m. (ii) Contracts from Sarawak Shell and Sabah Shell, for the provision of platform wells plug and abandonment. Works will be done at two Shell operated platforms involving five wells, and is expected to commence on April 2020 and completed by November 2020. The value of the contract is approximately RM100m. Thus, combined, these contracts sums up to RM136m in value.

Positive on the contract wins. Overall, we are positive on the contract wins, demonstrating UZMA’s expertise within the local brownfield oil and gas services space. We believe the contracts should be able to fetch operating margins of low-to-mid teens. Including these latest wins, its current order-book is enhanced to a guesstimated value of ~RM1.5b.

Upgrade to OUTPERFORM (from MARKET PERFORM previously),

with unchanged TP of RM0.85, pegged to 0.5x PBV, which is at -1SD from its 12-month mean, implying forward PER of 9x. No changes to our FY20-21E numbers post-contract announcement, as our assumptions have already encompassed such contracts value. That said, we upgrade our call to a trading “OUTPERFORM” as we see value emerging following the current weak market sentiment. Overall, we believe operationally, UZMA should be somewhat immune to current local political uncertainties, while the temporarily weak oil prices would also not overly impact work-order flows for brownfield production enhancement and decommissioning space, which are UZMA’s forte. We believe the biggest challenge for UZMA is to successfully convert contracts on hand to tangible work orders, and execute jobs at a profitable margin. Currently, the stock is trading at an attractive PER of merely 7.0x.

Risks to our call include: (i) job execution risks, (ii) costs overrun, and (iii) sustained downturn in local brownfield jobs flow.

Source: Kenanga Research - 3 Mar 2020