KENANGA RESEARCH Initiating Coverage PP7004/02/2012(029198) 18 May 2011 Uzma Berhad BUY Price: RM2.02 Right Time, Right Solutions Target Price: RM2.65 STOCK DATA Bloomberg Ticker Uzma MK YTD price chg 20.2% Market Cap 161.6 YTD KLCI chg 0.3% Issued shares 80.0 Beta 0.5 52-week range (H) RM2.49 Major Shareholders 52-week range (L) RM1.29 Dato’ Kamarul 50.0% 3-mth avg daily volume 195,971 Datin Rozita 10.5% Free Float 31.9% Lembaga Tabung Haji 7.6% FINANCIAL HIGHLIGHTS FYE 31 Dec 2008 2009 2010 2011E 2012E Turnover 134.6 98.8 116.1 201.4 224.4 EBIT 13.6 (12.0) (1.6) 24.5 27.0 Pretax profit 13.1 (12.5) (2.1) 23.6 26.1 Net Profit 10.3 (12.0) (2.0) 17.7 19.6 EBIT margin 10.4% -11.9% -1.4% 12.2% 12.1% Pretax margin 9.7% -12.6% -1.8% -11.7% -11.6% Effective tax rate 20.2% 4.8% 44.4% 25.0% 25.0% ROE 16.0% -21.0% -4.1% 31.6% 26.8% ROA 10.8% -14.2% -2.4% 16.7% 14.8% Net Gearing (x) 0.0 0.1 N.cash N.cash N.cash Growth ratios Turnover 5.0% -26.6% 17.5% 73.4% 11.4% EBIT 1.6% >-100% -86.2% >100% 10.4% Pretax profit -0.8% >-100% -83.1% >100% 10.8% Core Net profit 24.7% >-100% -83.3% >100% 10.8% Per share data EPS (sen) 12.8 (14.9) (2.5) 22.1 24.5 EPS growth (%) 24.7% >-100% -83.3% >100% 10.8% PER (x) 15.7 (13.5) (81.1) 9.1 8.3 Gross DPS (sen) 2.5 0.0 0.0 2.5 3.0 Div. Yield (%) 1.2% 0.0% 0.0% 1.2% 1.5% NTA/share (RM) 0.8 0.6 0.6 0.8 1.0 Historical price ratio (X) 2006 2007 2008 2009 2010 Price /Earnings - - 12.0 10.4 n/a Price /Book - - 2.0 2.3 2.7 SHARE PRICE CHART 1.00 1.50 2.00 2.50 3.00 Ma y‐10 A ug‐10 Nov‐10 Feb‐11 The Research Team [email protected]Tel: 603-2713 2292 Uzma Berhad (“Uzma”) provides Geoscience and Reservoir Engineering (GRE) consultancy in the O&G industry which involves evaluation of hydrocarbon reservoirs to determine their characteristics and most importantly, production feasibility of the field. Recently, Uzma expanded into new businesses, which complement its core consultancy with integrated services to drive future revenue growth riding on Petronas’s quest to increase domestic oil production through Enhanced Oil Recovery developments and deepwater explorations. We initiate coverage with a BUY recommendation and TP of RM2.65. Uzma operates in a niche knowledge base segment that requires high technical knowledge and in-depth understanding of the hydrocarbon reservoirs to determine the availability of their resources, characteristics, methods and recovery factors of each oil reserve found. Standing up among the big boys. Uzma’s blend of local and foreign experts have been steadily building clientele base and establishing track records with Petronas and various international O&G operators in Malaysia to compete with the likes of Schlumberger and Halliburton. Main beneficiaries in domestic IOR/EOR developments as Uzma’s core competency and technology offer cost effective solutions to low producing and idle wells while riding on Petronas’s quest to increase domestic production through development of brown fields and exploration for green fields. While it is almost impossible to patent its flagship Low Pressure System (LPS) globally, Petronas’s long term service agreement in Feb11 did provide Uzma the required track records to tap into the vast opportunities within the region. Blue skies ahead as synergies between its core GRE and new revenue streams (MECAS, Wireline and UzmaPres) will spur a positive turnaround in FY11 after a dismal performance in FY09 and FY10 stemmed from the global oil shock in early 2009. We expect Uzma to see daylight in FY11 with estimated FY11 revenue of RM201.4m and RM224.4m for FY12 which translate into respective net profit of RM17.7m and RM19.6m, respectively. Uzma has a strong order book of c.RM700m, providing visibility up to 2013, while its tender book is registered at RM2.0b, of which bulk of potential contracts are in the Enhanced Oil Recovery development. We initiate coverage on Uzma with a BUY recommendation and TP of RM2.65 based on 12x PER over FY11’s EPS of 22.1 sen. The fact that the era of easy oil recovery in Malaysia and also most of the oil production countries is over actually turns out to be a ‘blessing in disguise’ for Uzma as it has managed to develop and capitalize on its knowledge to create cost effective solutions for the Enhance oil Recovery development.
Transcript
KENANGA RESEARCH Initiating Coverage
PP7004/02/2012(029198) 18 May 2011
Uzma Berhad BUYPrice: RM2.02Right Time, Right Solutions Target Price: RM2.65
STOCK DATA Bloomberg Ticker Uzma MK YTD price chg 20.2% Market Cap 161.6 YTD KLCI chg 0.3% Issued shares 80.0 Beta 0.5 52-week range (H) RM2.49 Major Shareholders 52-week range (L) RM1.29 Dato’ Kamarul 50.0% 3-mth avg daily volume 195,971 Datin Rozita 10.5% Free Float 31.9% Lembaga Tabung Haji 7.6%
Uzma Berhad (“Uzma”) provides Geoscience and Reservoir Engineering (GRE) consultancy in the O&G industry which involves evaluation of hydrocarbon reservoirs to determine their characteristics and most importantly, production feasibility of the field. Recently, Uzma expanded into new businesses, which complement its core consultancy with integrated services to drive future revenue growth riding on Petronas’s quest to increase domestic oil production through Enhanced Oil Recovery developments and deepwater explorations. We initiate coverage with a BUY recommendation and TP of RM2.65.
Uzma operates in a niche knowledge base segment that requires high technical knowledge and in-depth understanding of the hydrocarbon reservoirs to determine the availability of their resources, characteristics, methods and recovery factors of each oil reserve found.
Standing up among the big boys. Uzma’s blend of local and foreign experts have been steadily building clientele base and establishing track records with Petronas and various international O&G operators in Malaysia to compete with the likes of Schlumberger and Halliburton.
Main beneficiaries in domestic IOR/EOR developments as Uzma’s core competency and technology offer cost effective solutions to low producing and idle wells while riding on Petronas’s quest to increase domestic production through development of brown fields and exploration for green fields.
While it is almost impossible to patent its flagship Low Pressure System (LPS) globally, Petronas’s long term service agreement in Feb11 did provide Uzma the required track records to tap into the vast opportunities within the region.
Blue skies ahead as synergies between its core GRE and new revenue streams (MECAS, Wireline and UzmaPres) will spur a positive turnaround in FY11 after a dismal performance in FY09 and FY10 stemmed from the global oil shock in early 2009. We expect Uzma to see daylight in FY11 with estimated FY11 revenue of RM201.4m and RM224.4m for FY12 which translate into respective net profit of RM17.7m and RM19.6m, respectively.
Uzma has a strong order book of c.RM700m, providing visibility up to 2013, while its tender book is registered at RM2.0b, of which bulk of potential contracts are in the Enhanced Oil Recovery development.
We initiate coverage on Uzma with a BUY recommendation and TP of RM2.65 based on 12x PER over FY11’s EPS of 22.1 sen. The fact that the era of easy oil recovery in Malaysia and also most of the oil production countries is over actually turns out to be a ‘blessing in disguise’ for Uzma as it has managed to develop and capitalize on its knowledge to create cost effective solutions for the Enhance oil Recovery development.
Uzma Bhd - 18 May 2011 Page 2 of 11
Company Overview Dato’ Kamarul Redzuan Muhamed founded Uzma Bhd in 2000 with initial business in manpower consultancy and subsequently expanding into Drilling Project Management and Geoscience and Reservoir Engineering consultancy. Since then, Uzma has expanded into an international O&G service company providing an array of services to the upstream of Oil & Gas sector across the exploration, development and production phases. In a nut shell, Uzma is a group of technical experts in the O&G field providing consultancy in subsurface studies.
Currently, they are the only listed Malaysian company in this highly technical and niche market segment competing with the likes of established ‘heavyweights’ such as Schlumberger Group and Halliburton. Since inception in 2000, Uzma has been steadily building up its clientele base and establishing track records with Petronas and various international O&G players supported by its highly experienced blend of local and foreign experts. Uzma meanwhile has operations in overseas, including operational subsidiaries in Perth, Australia and Bangkok, Thailand, and overseas representative offices in Doha, Qatar and Jakarta, Indonesia. These overseas presences facilitate the group’s overseas marketing activities and support overseas project implementations.
Business In the business of hydrocarbon reservoir evaluation, Uzma’s priority is basically to manage and reduce UNCERTAINTIES in order for their clients to make better and informed decisions prior to development of any O&G fields. Based on seismic data collected, Uzma conducts analysis and advises clients on the availability of oil resources, characteristics of the oil reservoirs and most importantly, the method and recovery factor of each oil reserve found. Therefore, this place Uzma at the forefront of decision making in the O&G industry as evaluations from basin or reservoir studies will determine the economic viability and hydrocarbon availability of each oil field. Only then, development decision is made, which leads to award of fabrication, drilling, offshore marines support and maintenance contracts as we are accustomed with in Malaysia’s O&G industry. Uzma’s core divisions are as follows:
Uzma’s position in O&G value chain
Source: Company Data/ Kenanga Research
Uzma Bhd - 18 May 2011 Page 3 of 11
Business Activities
Source: Company Data/ Kenanga Research
a. Geoscience and Reservior Engineering (GRE)
GRE is basically petroleum engineering concerned with finding reserves, characterising the reservoir and optimising the production of oil and gas from reserves. GRE encompasses GRE studies and GRE software services.
i. GRE studies involve highly technical studies to help clients in identifying potential hydrocarbon reserves, characterising reservoirs, estimating the quantity of recoverable hydrocarbons, and optimising production throughout the life-cycle of the O&G field. In general, GRE studies include the following:
- Regional studies: Integrated multi-disciplinary study of an entire basin area designed to characterise geology and fluid flow in hydrocarbon to provide PSC Operators with a broader understanding of the basins and its petroleum system from which prospects and leads can be identified, and potential hydrocarbon volume can be estimated. This basically allows PSC operators to optimise their exploration and appraisal strategies in order to improve the chances of successfully finding substantial hydrocarbon accumulations.
- Prospect evaluation: Preliminary geophysical and geological studies carried out to estimate the potential size, distribution and prospects of hydrocarbon reserves within an area of interest. Prospect Evaluation studies are usually carried out prior to the drilling of exploration or appraisal wells.
- Reservoir characterisation and modelling are to determine reservoir architecture, establish fluid-flow trends, construct a reservoir model and identify reserve growth potential.
- Field development planning provides a scheduled programme and cost estimate specifying the development activities required to develop and produce hydrocarbons from a particular field over the entire life cycle of the field. A field development plan is prepared prior to the sanctioning of a development project and its implementation at the O&G field.
- Field review: A large-scale, detailed, multi-disciplinary study of a mature hydrocarbon field, typically covering multiple producing wells and reservoirs.
- Enhanced Oil Recovery (EOR) intended to improve the ultimate efficiency of hydrocarbon recovery and production from reservoirs. EOR methods include Water–Alternating-Gas (WAG) injection, water injection, gas injection, chemical injection, and thermal recovery.
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- Laboratory services, which includes both core analysis and reservoir geology laboratory analysis. Core analysis provides direct measurement of rock properties, which are needed to determine the total fluid content, distribution, and the flow behaviour of the reservoir fluids or injection fluids. Meanwhile, the reservoir geology laboratory analysis is an interpretation service that integrates data from various sources such as biostartigraphy, geochemistry, sedimentology core descriptions, petrography and palaeontology to determine the age and environmental deposition of the reservoir.
ii. GRE software services are used to enhance studies being carried out for clients and also, in certain cases, resell the software to clients.
b. Drilling Services
Generally, Drilling Services supports the exploration, drilling, appraisal drilling, development drilling and other drilling activities with experienced personals equipped with tools, software, management system and also providing the necessary supervision required in the oil well drilling operations. Range of Drilling Service activities includes:
i. Well design engineering
ii. Casing, cementing and related services
iii. Drilling rig operations
iv. Directional drilling
v. Formation evaluation
vi. Mud logging
vii. Lithographic description
Uzma had been awarded drilling project management contracts from Petronas Carigali to international clients for projects throughout Asia, Indian subcontinent and Africa, Pakistan, Myanmar, Thailand and Sudan.
c. Laboratory Services
uzmALab offers a full range of laboratory services, including Routine Core analysis, Special core analysis, Reservoir Geology, Stratigraphy, Petroleum Geochemistry and Reservoir Fluids, which are used to provide actual laboratory data on reservoir storage capacity, fluid flow and fluid saturation. These data will ultimately be used in sub-sea formation evaluation, reservoir development, reservoir engineering models and hydrocarbon recovery predictions.
d. Wireline Service
Wireline is basically a cable technology to lower equipment or measurement devices into well for the purpose of well intervention and reservoir evaluation. UzmaWireline provides a complete range of cased hole service for all field development types which include logging, perforating, pipe recovery and mechanical services. Wireline can also be subdivided into open hole operations and cased hole operations.
e. Malaysian Energy Chemical & Services S/B (MECAS)
MECAS’s principal activities are manufacturing, marketing, distribution and supply of oilfield chemicals, equipment and services to the global petroleum and natural gas industry. In Mar10, Uzma acquired 70% interest in MECAS with remaining 30% continue to be held by Nalco (a member of the Dow Jones Sustainability World Index). The solutions offered by MECAS compliments Uzma’s Project & Operation and GRE division as it provides comprehensive solutions to clients by solving issues related to deepwater development, depleting reservoir and aging facilities.
f. Project and Operation Service
Project and Operation Services primarily deals with qualified and experienced geoscientists, engineers and technicians who are engaged to provide integrated Field Development Planning and concept selection, asset management and maintenance and hook up commission services.
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g. Manpower and consultancy
Manpower division basically manages the key O&G departments of clients by managing the human resource functions consisting recruitment, placement, resource solution involving geoscientists, engineers and technicians and other engineers and professionals.
Corporate Structure Corporate structure
Source: Company Data/ Kenanga Research
Management Team a. Dato’ Kamarul Redzuan Muhamed- CEO/MD
BSc in Petroleum Engineering- Colorado School of Mines, USA
Formerly of EPMI(ESSO); Sedco Forex ( Schlumberger); Smedvig, Roxar
b. Datin Rozita Mat Shah- Executive Director, Corporate Services
BSc in Chemical Engineering from Rensselaer Polytechnic Institute, USA
Formerly EPMI(ESSO); OGP Technical Services
c. Mr. Peter Augus Knowles- Exec. Director, International Business
BSc (Hons), Structural Mechanics Robert Gordon’s University, UK
Formerly of Prodrill; Smedvig Technology/Roxar; extensive global drilling expertise & experience.
d. En. Che Nazahatuhisamudin Che Haron- Exec. Director, Sales & Opertions
BSc in Electrical Engineering from Valparaiso University, Indiana, USA
Formerly Offshore Project Engineer at Scoptel
e. En.Mohd Kalid Embong- Exec. Director, Strategic & Business Planning
BSc in Petroleum Engineering Imperial College, London
Formerly of Petronas, 25 years veteran.
Uzma Berhad
Uzma Engineering S/B
(100%)
Uzma Teras S/B
(100%)
Uzma Engineering
Pty Ltd (100%)
Uzma Consulting
Ltd (48.98%)
MECAS(70%)
Uzma Oriental Co. Ltd. (35%)
Pt Uzma (95%)
Hefei Shun Xin Mineral
Development Pty Ltd (70%)
Uzma Bhd - 18 May 2011 Page 6 of 11
Industry Overview 2010 was a relatively uneventful year for the domestic and global O&G industry as the world economy was still finding its footing after the oil price shock in early 2009. The European sovereign debt issues and subsequent BP’s Mocando incident only created greater uncertainties in the O&G industry which resulted in various contract deferments and cancellations. Thus, it was not surprising that, save for the Sabah Oil and Gas Terminal (SOGT) contract award in 3Q10, only handful maintenance contracts were awarded domestically throughout 2010. However, the introduction of Economic Transformation Programme (ETP) was timely in reviving the domestic O&G industry as it became market’s market's crystal ball into Petronas‘s direction and objective going forth. The clear objective of ensuring sustainable production and increasing value of the downstream industries with the target of transforming Malaysia into becoming no.1 hub for oil and gas helped set the stage for potential future contracts, which fueled positive news flow that resulted in healthy share price buoyancy in local O&G sector in 1Q11. Petronas started the ball rolling by awarding its first Risk Service Contract (RSC) to develop and produce petroleum resources in Berantai marginal field in Jan11. In keeping the positive market sentiment, Petronas hinted on subsequent marginal field contracts to be revealed in 2Q11 while two other deepwater developments namely (Malikai and Kebabangan) are poised for contract announcements within the year. Hence, we believe the domestic O&G industry would remain overweight in the next few years. Additionally, Petronas in the recent Invest Malaysia event highlighted that the era of easy oil in Malaysia is over and future resources would lean towards more challenging resources, which involve the Enhanced Oil Recovery (EOR), small marginal fields and deepwater fields. As such, the main focus going forth would be in rejuvenating existing oil fields through Enhanced Oil Recovery, developing marginal fields through innovative solutions and intensifying exploration activities in deepwater. With Uzma’s core competence in subsurface studies, drilling services, project and operation services coupled with its flagship UzmaPres Low Pressure System technology, we believe Uzma is in a strong position to benefit from the slew of Petronas contracts, which focus on getting more out of existing fields through EOR efforts, unlocking stranded resources through marginal fields and growing resources through intensifying exploration in deepwater! Competitive Advantage
Being the only local player in this niche and specialized O&G segment, and having to compete with the established international players, it is therefore, a pre-requisite that Uzma has all the basic requirements in terms of Petronas license, qualified and experienced human resources and also all the specialized technologies and tools to operate and compete competitively with the ‘big boys’. Nevertheless, we believe the following points differentiate Uzma from the rest of the pack and provide them the competitive advantage:
a. Independent review
As opposed to other similar service providers which normally provide consultancy tied up with respective in-house equipment packages. In this aspect, Uzma pride themselves in offering similar consultation services but without equipment packages. This allows Uzma to provide independent solutions that Best-Fit-For-Purpose using various equipments/tools that are deemed suitable and economical.
b. Proven proprietary product
Uzma’s flagship UzmAPres is a breakthrough product that has been tested and proven after undergoing vigorous pilot tests with Petronas! The Petronas’s long term contract (3 years with 1+1 option) represents a significant milestone for uzmaPres’s Low Pressure System (LPS) as it provides the significant competitive advantage leveraging on proven track records to secure future contracts in the regional O&G market. Furthermore, the LPS technology has an approved copyright for its process system, which includes design, equipment flow and specifications.
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c. Local knowledge
Being the only local player with track records of over 10 years in the domestic scene, Uzma’s local knowledge will serve them well in understanding local geological characteristics used in basin and regional evaluation, reservoir studies and field development planning. A new entrant without the in-house local knowledge will have to acquire local knowledge by hiring geoscientists and engineers with the necessary knowledge and experience.
d. Track record
In the O&G industry, the preference of customers to appoint O&G Geoscience and Reservoir Engineering Service, Drilling Service, Project and Operation Service providers is predominantly based on proven track records of successful implementation. With huge investment at stake, it is therefore not surprising that service providers are typically required to demonstrate proof of similar experience at the company level when submitting their applications for contract tender by PSC operators. Furthermore, the amount of risk involved in locating, evaluating hydrocarbon reservoirs and predicting production performance of oil field leaves a little margin for errors. In this, Uzma has been steadily establishing its clientele base and building track records with Petronas and host of other established multi- national oil operators through years of quality service.
UzmaPres: The Catalyst for future growth
In mid 2007, Uzma undertook a special pilot study for Petronas called the Short term Enhancement Study. After the last few years of vigorous testing using Uzma’s proprietary Low Pressure System (LPS) technology, Petronas awarded Uzma a 3 years long term contract worth RM200m with option to further extend the contract for 2 years (1+1) for the oil field operations in Malaysia in Feb11.
LPS is basically a new proprietary system invented by Uzma, which helps to improve oil recovery in low producing and idle wells that suffered from, among others, lost in differential pressure after years of production. UzmaPres offers its clients an attractive solution to idling wells as it requires NO capital expenditure and NO well intervention during production in contrast to conventional solutions, which are costlier and above all, requires temporary shutdown of platform operations. Additionally, UzmaPres offers quick deployment to offshore platforms with almost immediate production upon installation. In Malaysia, Uzma has indentified close to 40 platforms domestically, which are suitable for this technology.
In addition to potential contracts domestically, Uzma has set their eyes on opportunities in the South East Asian region. The Petronas’s contract will provide the track record required for them to market and secure potential contracts overseas. With the huge opportunities both domestically and abroad, we believe the LPS will be the catalyst for Uzma as it offers economical and effective solution to the ‘old’ problem of idling well in the industry.
Mongolian Venture: A ‘breakaway’ project In 2009, Uzma through its subsidiary Uzma Oriental Ltd, entered into a 35% JV venture with Hefei Xing Xing petrochemical to drill and produce oil in the Baiyin Chagan Basin in Inner Mongolia, China for a concession period of 15 years. This represents Uzma's very first breakaway from conventional consultancy and into a project JV basis as one of the operators.
Currently, 44 wells (out of the expected 137 wells in total) were drilled with 6 wells have been in production. The initial productions from these 6 wells are irregular despite preliminary studies indicated oil reserve of c.100m barrels of equivalent with the combination of both heavy and light oil. However, due to the heavy oil characteristic, the recovery ratio is believed to be only c. 10%-20% (Typical recovery ratio of a normal oil well is 35%). According to management, since this field is considered as a marginal filed, the entire set–up is kept to a minimum to ensure cost efficiency with extracted oil being stored in tanks before being taken away in trucks. Thus, no heavy investment capital is required as there is no network of pipelines.
In April 2010, JunLun International joint the JV as a new partner whereby JunLun will be responsible for all the drilling cost and production cost while Uzma plays the role of consultancy and project management. Going forth, management is keeping its options open while continuing to provide its services to support the on-going drilling operations.
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Competitors Established international players operating in Malaysia are:
a. O&G companies/operators: The competitors faced by Uzma are actually the national oil companies or operators as these companies normally have the expertise and capabilities to carry out the subsurface studies in-house. However, manpower constraint often leads these companies to prioritise in terms of allocation of resources in specific oil fields globally and this opens up opportunities to companies like Uzma. In certain cases, Uzma also provides a second opinion advices to these operators.
b. Schlumberger Group is the world leading oilfield service company supplying technology, information solutions and integrated project management that optimize reservoir performance for customers working in the O&G industry. With more than 80 years of history, Schlumberger employs over 108,000 people from 140 nationalities working in approximately 80 countries around the globe.
c. Halliburton group: Founded in 1919, Halliburton is one of the world’s largest provider of products and services to the energy industry with over 60,000 employees in approximately 80 countries. It serves the upstream O&G industry throughout the lifecycle of the reservoir from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production throughout life of the field.
d. Baker Hughes Group was formed in 1987 and provides high performance drilling, evaluation, completion and production technology and services, integrated operation and reservoir consulting. It has more than 50,000 employees in over 90 countries.
Risk a. Sustained fall in the market price of hydrocarbon: O&G Service providers are inevitably
affected by the fluctuation in the global oil price. A sustained lower price of hydrocarbon will negatively impact the entire value chain in the O&G industry, which may lead to lower demand for supporting products and services. This was evident in 2009 as Uzma experienced project deferment and cancellations after the global oil price declined to below USD40 bbl. Nevertheless, there are policies in the O&G industry that require operators to re-study existing oil fields every 3 years to constantly monitor status of reserve level over its life cycle. Therefore, Geoscience and Reservoir Engineering is also a recurring business. Furthermore, Uzma’s flagship LPS technology does not require capital expenditure on the part of operators, and that makes it attractive even during the period of oil shock!
b. Change in Petronas policy: A fundamental change in Petronas’s policies with regards to regulating the O&G Industry in Malaysia may negatively impact incumbent operators by increasing competition in the industry. However, there is a high barrier to entry from any potential local player as it is a highly niche segment which requires technical experts with vast experience and most importantly proven track records.
c. Downturn in the local or global economy: A prolonged or widespread downturn in the global economy is likely to negatively affect the global demand for hydrocarbons, and production of hydrocarbons. This in turn likely to negatively affect demand for supporting products and services in Malaysia, as activities in O&G Industry in Malaysia also slows down.
Uzma Bhd - 18 May 2011 Page 9 of 11
Financials
Profit track record
Source: Kenanga Research
Sterling performance prior to 2009 oil price shock: Uzma recorded sterling revenue CAGR of 53.8% from 2003 to 2008 with revenue surging from RM15.65m to RM134.6m. Similarly, net profit grew from a mere RM0.18m to RM10.3m in 2008 driven by strong growth in the GRE division benefiting from high oil prices.
Oil price shock in 2009: Shortly after listing in Aug08, the oil price nose dive to below USD40bbl and led to various contracts being either put on-hold or cancelled. Consequently, Uzma suffered a loss of RM12.5m in FY09 feeling the full impact of the oil price shock and further blows from provisions for doubtful debts amounting to c.RM5.0m due to outstanding payment from clients. In 2010, Uzma narrowed the gap with net loss of RM2.0m as it recovers in tandem with oil price hike.
Expecting to see daylight in FY11 with estimated FY11 revenue of RM201.4m and RM224.4m for FY12 which translate into respective net profit of RM17.7m and RM19.6m. While GRE segment remains its core business, we expect new segments (MECAS, Wireline and UzmAPRES) to drive both top-line and bottom-line going forth. The re-rating catalyst lies with the amount of new contracts for the provision of LPS technology in both domestic and regional market. Uzma will be announcing their 1Q11 results in end May11 which we expect to be a positive turnaround with progressive improvements in every quarter.
No fixed dividend policy: Uzma only declared dividend of 2.5sens once since listing in 2008. There was no dividend declared for FY09 and FY10. Going forth, Uzma does not have a fixed dividend policy as funds will be used for business expansion.
Order book of RM700m providing earnings visibility until 2013. Uzma has thus far secured contract awards worth c.RM700m while its tender book stands at c.RM2.0b. The huge tender book mainly consists of potential contract in the Enhanced Oil Recovery development and idling well rejuvenation both locally and within the region.
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Order book breakdown
Contract RM’m UzmaPres LTSA 300m Consultancy service in Iraq >200m PCSB Subsurface and EOR umbrella contract 100m Advance Flow Assurance Laboratory Testing 20m ExxonMobil production Chemical extension (MECAS) 50m Others 42m Total 712m
Source: Company data/Kenanga Research
Valuation & Recommendation All told, we initiate coverage on Uzma with a BUY call at TP RM2.65 using 12xPER (20% discount to the sector PER of 15x) over FY11 EPS of 22.1sen in view of new revenue streams (MECAS, Wireline & UzmaPres) spurred the turnaround and will continue to drive earnings’ growth going forward. Besides, Uzma’s LPS technology would be the ‘most sought after’ solution for the low producing and idle wells across the region. In addition, Uzma is poised to be one of the major beneficiaries with Petronas’s focus on Improve Oil Recovery (IOR) and Enhanced Oil Recovery (EOR) developments to increase domestic oil and gas production. Last but not least, we also believe that there are ample of regional market opportunities for Uzma’s LPS technology.
This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.
Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Chan Ken Yew Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: www.kenangaresearch.com Associate Director
