• We maintain our HOLD call and forecasts on UMW Oil and Gas Corp (UMWOG) but with a lowered fair value of RM0.45/share, based upon a 10% discount to the estimated book value of RM0.50/share after the completion of the group’s proposed rights issue by September this year.

• Recall that the group is still undertaking a massive recapitalisation at 1.6x its current market capitalisation via a RM1.8bil renounceable rights issue, priced at RM0.30/rights shares on a basis of 14-to-5 existing shares, bundled with a free 1-for-4 7-year warrant which is exercisable at RM0.395.

• Our earlier fair value of RM0.62/share was based on a 40% discount to current book value. However, in anticipation of the impact of the upcoming rights’ completion, the market is pricing ahead of the massive dilution which could cut our exrights valuation to RM0.35/share.

• Since the beginning of May this year when UMWOG aborted its proposed acquisition of Icon Offshore for RM589mil and Orkim for RM495mil but retained the rights quantum, UMWOG’s share price has fallen by 25% due to the impending dilution.

• Last week, PNB has issued an irrevocable undertaking letter to subscribe for its entitlement to the rights following the distribution of UMWOG shares from UMW Holdings.

• To ensure that UMWOG will secure the entire funds of RM1.8bil, PNB will also subscribe to up to 4.8mil new Islamic redeemable convertible 5-year preference shares (RCPS) at RM0.30/RCPS together with the 1-for-4 free 7-year warrant.

• PNB will own 45.5% directly in UMWOG after the distribution by UMW Holdings back to shareholders. To maintain UMWOG’s listing, PNB will not subscribe for the amount of rights shares which will lead to a UMWOG shareholding beyond the 65% threshold should minority shareholders renounce their rights.

• Hence, PNB will undertake to subscribe to only the proportion of RCPS which will enable UMWOG to reach the targeted proceeds of RM1.8bil, of which 83% is earmarked for debt repayment, thus lowering its gross gearing to 0.6x from 1.8x currently.

• While UMWOG’s prospects have slightly improved with the recent addition of two short-term charters worth US$35mil (RM151mil) for the group’s jack-up rigs Naga 3 and Naga 4, the charter rates may be at breakeven levels of US$60K/day against the backdrop of prevailing depressed market conditions.

• Given its unchanged weak earnings prospects, we view UMWOG’s current share price near to the ex-rights book value as justified.

Source: AmInvest Research - 14 Jun 2017