Investment Merits

• Experienced oil & gas (O&G) service provider offering innovative  and multiple solutions

• Higher earnings backed by stronger upstream activities and new  contracts

• Non-O&G expansion led by Large Scale Solar 4 (LSS4) project

Company Profile

Uzma, established in 2000, is an O&G service and equipment company  in South-East Asia. It offers various cost-effective integrated solutions  across the exploration, development and production phase within the  O&G industry. In recent years, the company has started to diversify  away from non-O&G businesses, and moved into renewable energy  (RE) (solar- and geothermal-related works), digitalisation, and  aerospace ventures.

Highlights

Benefiting from robust upstream activities. Being an experienced  O&G service provider offering innovative and multiple solutions, we  believe Uzma will be one of the beneficiaries of higher upstream  activities. Its O&G orderbook stood at MYR1.9bn as of Dec 2022,  providing revenue visibility of 2-3 years. Some of the key work orders  and projects include water injection module project, plug &  abandonment works, and coil tubing. Apart from that, the company  continued to win more contracts in the past few months including  provision of electrical submersible pumps, supply of integrated  production and integrity chemical and associated services, supply of  through tubing perforation equipment and services. We estimate its  current orderbook to be just below MYR2.5bn.

Potential overseas expansion. The company’s revenue will also be  supported by recent new contracts awarded domestically and overseas.  Uzma aims to generate 30% of revenue from overseas projects (from  18% currently). One of the ways is to deploy excess capacity (ie coil  tubing and hydraulic workover units) to ASEAN markets. Apart from the  existing operations in Thailand and Indonesia, Uzma is targeting to  expand its presence in Australia and the UK.

Non-O&G expansion led by LSS4 project. Uzma has set a 5-year  target to grow its non-O&G revenue to account for 40% of total revenue  by 2025. The non-O&G orderbook of above MYR700m is predominantly  the LSS4 project. It is targeting to achieve financial close for its 50MW  LSS4 project in the near term and the commercial operation date or  COD is scheduled within 12 months from financial close. Total project is  estimated at c.MYR220m and debt-equity ratio is likely to be 75:25.  Project internal return of return or IRR is guided to be a high single digit.  The EPCIC work could be awarded to its 49% owned Suria Infiniti.

Net gearing has declined to 0.56x as of 2Q23, from 0.64x as of  2Q22 due to repayment of facilities. We expect its gearing level to load  up subsequent to LSS4’s project financing drawdown and new facilities  drawdown for project mobilisation. In mid-March, Uzma proposed to  undertake a private placement of up to 10% of the total issued shares.  This is to mainly fund the LSS4 project

Company Report Card

Results review. 1H22 core earnings recovered strongly (+12x YoY) to  MYR23m on the back of stronger upstream well services activities and  better gross margins in the absence of COVID-19 related costs. While  3Q23 is likely to be seasonally weaker, we expect 2H23 performance to  remain solid.

Management. Uzma is helmed by its founder and managing director  Dato Kamarul Redzuan Muhamed, and executive directors Dato’ Che  Nazahatuhisamudin Che Haron (who has over 20 years of experience  in offshore engineering) and Ahmad Yunus Abdul Talib (who has more  than 25 years of experience in the O&G industry).

Investment Case

We like Uzma for being an experienced and innovative O&G service  provider that offers a range of services across the value chain. Overall  earnings recovery is likely to be backed by the recovery of upstream  activities, and the continuous expansion of its orderbook amid a  sustainable environment of oil prices – which may maintain clients’  spending.

Based on an ascribed P/E range of 8-10x on 2024F earnings, we derive  a fair value range of MYR0.78-0.98. Our ascribed valuation is at its 5- year mean and +1.5SD.

Key risks: i) Weaker-than-expected work orders from clients; ii)  significantly lower-than-expected oil prices that could limit client  spending, and (iii) higher-than-expected operating costs.

Source: RHB Securities Research - 16 May 2023