UZMA has secured a five-year contract from Sarawak Shell, worth ~RM40m. Overall, we are positive on the contract win, reflective of the current rise in activity levels, despite its smallish size making up only ~2% of its current order book of ~RM2b. No changes to our FY23-24F earnings and TP of RM0.67, but we downgrade our call to MARKET PERFORM given the recent strength in its share price. Going forward, we feel that translating its current order book into earnings delivery is crucial to act as another re-rating catalyst.

New contract from Sarawak Shell. UZMA announced that its 70%-owned subsidiary Malaysian Energy Chemical & Services Sdn Bhd was awarded a contract from Sarawak Shell Berhad for the provision of kinetic hydrate inhibitor, corrosion inhibitor and associated services for the Shell Timi field. The duration of the contract is five years, effective January 2023 to 2028, with a value of approximately RM40m.

Positive on the contract win. Overall, we are positive on the contract award as it demonstrates UZMA’s ability to continue winning jobs within the brownfield services space amidst the current elevated oil price environment. Nonetheless, the contract is rather smallish in size – making up only ~2% of its current order book of ~RM2b (of which roughly half is derived from umbrella contracts). We expect the job to fetch gross margins of ~40-45% - in line with its historical average.

No changes to forecasts. Given the smallish size of the contract, we made no changes to our FY23-24F earnings (implies earnings growth of 58-11%), as the job is deemed to be well within our job replenishment assumptions.

Downgrade to MARKET PERFORM, with an unchanged TP of RM0.67 – pegged to 10x PER, based on a 33% discount on valuations ascribed to other local-centric oil and gas equipment and services providers (e.g. DAYANG, VELESTO), given UZMA’s far smaller market cap. There is no adjustment to TP based on ESG given a 3-star rating as appraised by us (see page 4).

We continue to like UZMA for being a beneficiary of increased brownfield oil and gas activities, providing a wide range of services such as production enhancement and optimisation, as well as late-life operation and maintenance. However, given the recent rally in its share price, we believe these positives have been well priced in. Additionally, we believe it is crucial for the company to successfully materialise its current healthy order book into bottom-line earnings to meet profit growth expectations in order to serve as another re-rating catalyst.

Risks to our call include: (i) significant pull-back in oil prices weighing on oil & gas activities, (ii) project cost overrun and delays, and (iii) escalating input cost.

Source: Kenanga Research - 26 Jan 2023