Feb 19, 2016

Uzma Defying The Odds

UZMA Stock Code 7250

Uzma stock analysis

■ Uzma’s strength in brownfield oilfield services places it in a relatively safer position
to weather the industry slowdown.
■ It will benefit from three new major projects coming onstream in 2016.
■ Tanjung Baram RSC is still cashflow positive despite the low oil price.
■ We increase our target price, now based on 11.6x CY17 P/E.
■ Uzma is our top pick for the upstream small caps.

Three new major income streams

In our view, Uzma is going to benefit from three new major income streams this year: Tanjung Baram marginal oilfield RSC, D18 Water Injection Facility project, and East Malaysia coiled tubing unit contract.

Tanjung Baram marginal oilfield in full production
Oil production from the Tanjong Baram field commenced on 18 Aug 2015. We believe that this field will produce an average of 1,000-2,000 barrels of oil per day. Uzma is set to enjoy full-year contribution from the project in 2016. We believe at the current crude oil price of around US$30 per barrel, this project is still cash flow positive, but there is a risk of the project not being viable if oil price drops to below US$20 per barrel.

D18 Water Injection Facility commencing operations in 2Q16
Uzma’s D18 WIF project is progressing well. It is scheduled to commence operations in 2Q16, with a RM200,000 daily rate for the next five years. The development costs are within budget at c.US$65m. We expect the project to contribute positively to Uzma’s revenue and earnings despite the weaker ringgit against the US dollar.

Order book intact, but facing lower service rates
Uzma’s order book now stands at c.RM2bn. But Uzma is not immune to the prolonged depressed crude oil price and muted oilfield services activity level. Although we believe that production level at brownfields should stay stable, cost cutting measures by Uzma’s clients would mean that some of the oilfield service work would be deferred, while some contracts will face lower rates of service.

Expected to perform relatively better than the industry
We believe that Uzma is better positioned than most of its peers to weather the industry slowdown. Only 10-15% of its revenue is directly exposed to the exploration stage via its geoscience and petroleum engineering (GPE) division. Most of its exposure is to brownfield oilfield production and maintenance services through its project oilfield and optimisation services (POOS), which contributes around 50% of its total revenue.

Uzma financial analysis

Maintain Add
Our FY15-17 EPS forecasts are intact, but we increase our target price as we increase our valuation, now based on 11.6x CY17 P/E, a 20% premium to our oil & gas upstream segment average due its stronger earnings growth. We reiterate our Add call on the stock, which is our top pick among upstream small caps. Potential re-rating catalysts are full production at its Tanjung Baram RSC and commencement of the D18 WIF project.

source: CIMB Research - 16/02/2016

The Group is involved in the provision of Oil and Gas Geoscience and Reservoir Engineering Services Oil and Gas Drilling Services and Oil and Gas Project and Operations Services.