Uzma’s diversification necessary move to propel group ahead
KUCHING: The research arm of TA Securities Holding Bhd (TA Research) recently initiated coverage on Uzma Bhd (Uzma) and given a ‘buy’ recommendation with a target price of RM2.29 per share.
Justification for this recommendation comes in its earnings, as TA Research note that the group’s earnings are diversified and span across the upstream oil and gas (O&G) value chain for both greenfield and brownfields.
Following the suspension of new greenfield investments, the diversification of Uzma’s earnings contributes to strong and stable prospects with the research arm forecasting earnings expansions of 21 per cent and 22.2 per cent for Uzma in financial year 2016 (FY16) and 17.
“In contrast, Uzma’s peers with solitary exposure to greenfield projects are currently struggling with weak earnings and profitability,” said the research arm.
In terms of financial health, the research arm estimated that the group’s net gearing would be about 0.4-fold which can be seen as quite healthy, implying that there is room for potential acquisitions and new project undertakings.
Uzma’s technological prowess and proven execution track record also played a contributory role in it’s ‘buy’ recommendation from TA research as the two factors are essential during an industry downturn where generic O&G asset owners struggle to find jobs for their highly commodity assets.
Notably, their original innovation, uzmAPRES, managed to more than double production of a brownfield well and gain wider acceptance by Petroliam Nasional Bhd (Petronas) and its PSCs.
The research arm also believes that Uzma is the frontrunner to clinch most local contracts related to the subsurfacing division due a lack of local competition and increased backing from Petronas.
“Although the technology division does not contribute much to Uzma’s earnings, it enables the group to cross sell services from other divisions,” it said.
This is due to acquisition of seismic data that would provide Uzma with relevant information for them to adapt and apply to other divisions.
Uzma in partnership with Enquest secured a Small Field Risk Service Contract (SFRSC) recently with the marginal field located a Tg Baram.
This could be seen as a risk as marginal fields may but uneconomical. However, Tg Baram field has a significantly lower BEP when given lower capital expenditure and lifting costs.
“Note that, the Group spent circa US$50 million for its platform compared to Dialog’s estimates” said the research arm.
“Therefore, in the longer term, upon full recovery of capex, we expect earnings to receive a boost from RSC remuneration fees,” the research arm concluded on the matter.
While Uzma has demonstrated itself to be a very strong and stable company, investors should still take note of the key risks that Uzma faces.
One of the main risk that plagues Uzma is it’s dependence on Petronas and the local market to obtain contracts.
“Indeed, two-thirds of Uzma’s revenue is derived from Petronas and almost 90 per cent from Malaysia. Therefore, if Petronas chooses to utilise another service provider, this would impact Uzma’s earnings negatively,” said the research arm.