Uzma Bhd
(Feb 7, RM1.72)
Maintain market perform with an unchanged target price (TP) of RM1.79: Yesterday, Uzma Bhd announced that it on Feb 3, 2017 received approval from Petronas for a press release in relation to the award from Petronas Carigali Sdn Bhd to Uzma Engineering Sdn Bhd, a wholly-owned subsidiary for an umbrella contract for the provision of electric wireline logging. The contract has a duration of three years, commencing from Dec 1, 2016 to Dec 30, 2019 with two extension options of one year each for cased hole logging services across the Pan Malaysia area.

We are positive about this contract award as it marks the maiden Pan Malaysia contract secured by Uzma, which was previously dominated by established foreign players. Given that it is an umbrella contract, we suppose that Petronas had shortlisted five to six licensed players which qualified for technical specifications. The timelines for work order and service rates are not explicitly laid out, but we expect the contract to pick up in the second quarter of 2017 (2Q17) post-monsoon season.

Tanjong Baram risk service contract’s (RSC) earnings contribution is expected to be minimal in the financial year 2016 (FY16) as most cash received from barrels lifted are used to offset operating expenditure and recouping of capital expenditure (capex). Meanwhile, we expect the D18 water injection project to contribute in 4Q16. Recall that Uzma secured this project with contract value of RM350 million to RM400 million in July 2015 for a duration of five years.

While Uzma has yet to secure any work orders at this juncture, we do not factor any earnings contribution from this contract. However, we believe such contract could fetch earnings before interest and tax margins ranging from 10% to 30% depending on the work scope and complexity of the jobs.

Despite facing margin corrosion pressure due to low offshore activities, we believe Uzma’s outlook will gradually recover given that higher crude prices will speed up capex reimbursement of its Tanjong Baram RSC and entice oil majors to roll out more maintenance jobs. Following that, we maintain our “market perform” call with a higher TP of RM1.79 (from RM1.63 previously) pegged to 1.1 times estimated FY17 price-book value (from 1 time previously) which is equivalent to a -1 standard deviation over the five-year mean.

The risks to our call include weaker-than-expected recovery in the oil and gas market, slower-than-expected delivery in D18 water injection project and lower-than-expected margins. — Kenanga Research, Feb 7