UZMA will commence execution of its RM450m Hydraulic Workover Units (HWU) order book in coming quarters as the monsoon season ends. It is currently actively bidding for a new water injection project, which should bolster its recurring income starting from FY26. We maintain our forecasts, TP of RM1.45 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 Hydraulic Workover (HWU) contract starts ramping up. The group's HWU business is poised for a significant increase in work orders from its clients in coming quarters. To recap, UZMA secured RM450m worth of HWU-related jobs back in June 2023 but was unable to ramp up due to the incoming monsoon season. This increase in work orders will boost UZMA's HWU-related revenue, driving a significant YoY growth.

2. Bidding for a new water injection project. UZMA is currently bidding for a significant water injection project of which the outcome will be made known over the near term. We understand that it is one of the frontrunners given its proven track record in executing the D18 water injection project. This project, won by the group in 2016, had a contract value of RM400m and spanned five years. Our forecasts have yet to reflect any new water injection wins.

3. Sungai Petani Solar set to come online in 1QFY25. The 50MW solar power plant, located in Sungai Petani, has achieved a 70% completion rate, marking a significant progress from 40% in 1QFY24. The project is on track for testing by TENAGA by the end of May 2024, with expectations to commence full operations by 1QFY25, ushering in initial earnings contributions from the NEDA Corporate Green Power Programme (CGPP).

Forecast. Maintained.

Valuations. Similarly, we maintain our TP at RM1.45 pegged to 10x CY25F 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 an earnings stability anchor. 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 - 26 Feb 2024