This article first appeared in The Edge Financial Daily on May 9, 2017 - May 15, 2017

Uzma Bhd
(May 8, RM1.78)
Maintain market perform call with a lower target price (TP) of RM1.80: Last Friday, Uzma Bhd proposed to issue up to 29.1 million new ordinary shares, representing around 10% of its existing shares at an issue price to be determined later. Note that the private placement does not require further approval given that the general mandate was approved in the previous annual general meeting convened on May 25, 2016. The placement is expected to be completed by the third quarter of this year (3Q17).

Assuming the placement shares are issued at an indicative share price of RM1.74, which is less than 10% of the five-day volume weighted average market price, Uzma could raise RM50.6 million from the exercise. The bulk of the proceeds (around 59%) will be used for capital expenditure purposes, followed by repayments of bank borrowings and working capital at 30% and 10% respectively.

Although the placement would be dilutive for short-term earnings per share (EPS) even after factoring in interest cost-savings of RM1.2 million per year, we believe the exercise is positive in the longer run as the fund is to be used for investment in equipment for its wireline, well drilling services and hydraulic workover unit businesses as well as for future development/investment. Meanwhile, it also helps to strengthen its financial position and lower its gross gearing of 1.3 times as of the fourth quarter of the financial year ended Dec 31, 2016 (FY16) to 1.1 times.

Post-private placement and loan repayments, we increase our estimates of FY17 and FY18 earnings by between 1% and 3%, factoring in interest cost-savings. With the enlarged share base, FY17 and FY18 EPS will be diluted by 8% and 6% respectively, to 11.3 sen and 11.9 sen.

Uzma's share base will be enlarged to 320 million with the completion of the exercise which is slated to be completed by 3Q17. We decide to roll over our valuation base year to FY18, pegged at an unchanged price-to-book value of 1.1 times, which is equivalent to -1 standard deviation over the five-year mean. All in, we keep our "market perform" call on the stock with a lower TP of RM1.80 per share (from RM1.81 previously).  

Risks to our call include: i) a weaker-than-expected recovery in the oil and gas market; ii) slower-than-expected delivery of the D18 Water Injection Facility in Tanjong Baram, Sarawak; and iii) lower-than-expected margins. - Kenanga Research, May 8