• We recently visited Uzma Berhad’s facility in Rayong, Thailand. We admire its engineering capability that can design innovative solution particularly for artificial lift application in Malaysia.

• The company has emerged as the second largest ESP provider in Thailand despite stiff competition against more established players such as Schlumberger and Baker Hughes.

• Following its successful venture in Thailand, the company intends to penetrate Middle East ESP market to further enhance its brand image among oil majors.

• Uzma stock price has retreated from its 1-year high of RM1.37. Currently, the stock is trading at PER of 7x which is below average PER of 9.1x, potentially indicating that it is undervalued.

Introduction to Uzma Artificial Lift

Uzma Artificial Lift Sdn Bhd (UAL) is a 75%-owned subsidiary of Uzma Berhad (Uzma). UAL specialises in artificial lift and pumping solution service. The company was founded in 2018 and it operates a manufacturing facility in Rayong, Thailand. Financially, we gathered that it has been profitable since its inception. Besides that, it has never made any cash call, suggesting that the business plan are well executed and sustainable.

Artificial Lift Service is Essential to Boost Recovery Rate

Artificial lift is one type of enhanced oil recovery (EOR) technique. This service are typically required by aging oil fields particularly when natural pressure in reservoir has considerably weakened and the water cut (portion of water vs oil ratio) is high. There are 2 types of artificial lift that is prevalently been used in the industry i.e. gas lift and electric submersible pump (ESP).

The Challenge of Artificial Lift Application in Malaysia

In Malaysia, 90% of artificial lift used is gas lift type which suits the existing platform design that need to cater to the abundance of gas presence in the reservoir. However, gas lift is not effective when there is too much water i.e. water cut reaching 60%. Thus, many oil and gas companies in Malaysia are exploring to use ESP to further boost recovery rate from existing field. Notwithstanding, we understand that ESPs application could also be challenging due to higher cost related to platform modification as well as more space is required to house the power generation system to run the pump.

UzmaBoost - Uzma’s Tailored Solution to Malaysia’s Unique Problem

Uzma has designed a new product called UzmaBoost that employs a unique artificial lift approach that combines both pump and gas lift system. With this solution, the pump will be powered by compressed gas from existing gas lift system that runs a specially designed gas turbine. Thus, it offers the same benefit of an ESP without the need for changing-out existing gas lift surface equipment for power generation

and typical ESP surface equipment. This significantly increases production without the need of significant capex spending.

Competing Directly against Global Player

Schlumberger and Baker Hughes are two prominent players in the artificial lift service market. Being a smaller player with faster response time to clients’ need, Uzma claimed that it has emerged as the second largest ESP player in Thailand ahead of Baker Hughes. Moving forward, the company plans to acquire more market share from global player through its expansion into the Middle East.

Earnings Outlook

As of June 2024, Uzma’s orderbook stands at RM2.95bn. This comprises of (i) well solution orderbook of RM941mn (i.e. hydraulic workover unit (HWU) service for well workover operation and well decommissioning), (ii) MECAS’ chemical production services, (iii) lease income from water injection facilities such as Marsya and Marsya 2.0, (iv) Power Purchase Agreement (PPA) income from Large Scale Solar 4 (LSS4) project and (v) other non-oil and gas business ventures. Notably, this is higher than the peak recorded in FY16 (Chart 1), thanks to its successful diversification out of oil and gas sector.

Current Valuation: Trading at Discount to 4-year Mean

The stock has fallen down by 36% from its 1-year high of RM1.37, potentially due to concern on potential slow-down in Petronas’ activities due to its conflict against Petros. Nonetheless, the stock is currently trading at 1-year forward PER of 7.0x (Chart 2) which is below its 4-year historical average PER of 9.1x. This may indicate that the stock is currently undervalued.

Source: BIMB Securities Research - 24 Oct 2024