UZMA has secured a 5-year contract from HIBISCUS to provide chemicals and related services for a field, aligned with our assumption of UZMA securing RM1b new orders for its upstream services in FY24. We maintain our forecasts, TP of RM1.22 and OUTPERFORM call.

UZMA has successfully secured a 5-year contract from HIBISCUS for the supply of chemicals and related services for the PM3 field. The contract, effective from Nov 2023, to Nov 2028, involves the provision of integrated production, integrity, and water injection chemicals, with the contract value dependent on final work orders to be issued by the client. For context, in the calendar year 2013, UZMA secured a comparable five-year contract for similar services, provided by Exxon Mobil, with a total value of RM238m.

This aligns with our assumption of UZMA securing RM1b new orders for its upstream services in FY24. UZMA possess the ability to execute the project given its successful delivery of existing projects, particularly in the challenging deepwater segment. We estimate the net margin for the contract to be in the range of 7%-8%, consistent with the overall performance of the group's business.

Forecast. Maintained.

Valuations. We also maintain our TP of RM1.22 pegged to 10x FY25F PER, 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). The stock is one of our top picks for the oil & gas sector.

Investment case. We like UZMA due to: (i) it being a beneficiary of the current upcycle in upstream activities leading to an increase in the upstream services contract flows, (ii) its active thrust into sustainable businesses via its new energy segment that enhances UZMA’s ESG appeal and future-proof its earnings, and (iii) the coming launch of its 50MW large scale solar plant that will boost its recurring income and hence anchor earnings stability. Maintain OUTPERFORM.

Risks to our call include: (i) 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 - 31 Jan 2024