UZMA's new plug & abandonment and work-over (P&A) contracts enjoy more favourable terms than the previous umbrella contract. Meanwhile, we understand that there has been positive feedback from its clients on its deepwater oilfield chemicals. It is poised for more job wins on a sizeable bid book. We maintain our forecasts, TP of RM1.22 and OUTPERFORM call.

We came away from UZMA’s post-results briefing feeling upbeat about its near-term prospects. The key takeaways are as follows:

1. The (P&A) and workover contracts, housed within the upstream Oil & Gas segment, feature improved terms compared to the previous umbrella contract. Management explained that the better contract terms led to improved EBIT margins back in 1QFY24. We anticipate this positive trend to persist over the next two years, driven by an expected substantial increase in demand for upstream well services.

2. Positive feedback on its deepwater chemicals. We understand that UZMA’s clients have expressed satisfaction with the effective performance of the chemicals, a notable achievement given the stringent requirements for deepwater applications. Notably, UZMA's chemical subsidiary, MECAS, recently reclaimed its position as the leading player in Malaysia's oilfield chemical business by securing an RM120m contract (three to five years) for deepwater operations with Shell.

3. The group's order book stands at RM2.4b, with new energy projects, primarily solar power purchase agreements (PPA), representing 33%. Well and production solutions in the upstream Oil & Gas segment account for 39% and 28%, respectively. The substantial bid book at RM2.3b signals increased wins for the group in FY24, with an expectation that the majority will be in the upstream Oil & Gas segment. Meanwhile, the new energy division is in its early growth stage and anticipated to expand as the group gains more experience.

Forecast. Maintained.

We maintain our TP at RM1.22 pegged to an unchanged FY25F 10x PER, which is consistent with the average PER for small to mid-cap upstream services players. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like UZMA due to: (i) it being a beneficiary of the current upcycle in upstream activities leading to increased O&G contract flows, (ii) its active thrust into sustainable businesses via its new energy segment which enhances UZMA’s ESG appeal and help future proof its earnings, and (iii) the looming launch of its 50MW large scale solar plant that will boost its recurring income. Maintain OUTPERFORM.

Risks to our call include: (i) a premature end to industry upcycle following a dip in oil prices, (ii) poor project execution on new energy division leading to cost overruns and delays, and (iii) opex pressure emanating from an inflationary environment, particularly on expenses for manpower and materials.

Source: Kenanga Research - 5 Dec 2023