Investment Highlights

• We maintain our HOLD call on UMW Oil and Gas Corp (UMWOG) with a lowered fair value of RM0.30/share (from an earlier RM0.45/share), based on a 40% discount to the upcoming diluted book value of RM0.50/share, which the market has already adjusted for. As a comparison, Malaysia Marine & Heavy Engineering, which has a healthy net cash of 41 sen/share but also expected to register losses this year, is currently trading at half its book value.

• Recall that this is after accounting for the massive recapitalisation at 2.6x 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.

• We have reduced FY17F loss by 17% as the group’s 1HFY17 results was better than our FY17F loss but worse than consensus. UMWOG’s 1HFY17 loss of RM158mil accounted for 45% of our earlier FY17F loss estimate but 61% of street estimate. As expected, the group did not declare any dividends due to the losses.

• UMWOG’s 2QFY17 revenue rose 88% QoQ to RM140mil as the number of rigs on active charter rose to 5 from 2 in 1QFY17 as utilisation rate improved to 68% from 26%. This halved the group’s 2QFY17 losses QoQ to RM51mil.

• As Naga 5’s short-term charter with Petrofac was recently completed, 6 out of 7 rigs wholly-owned by UMWOG (as 50% of the Naga 1 semisubmersible rig’s equity stake was sold to JDC Panama recently) are currently being utilised.

• However, Naga 5 has just secured a 1-year charter (with another 1-year extension) commencing in mid-September this year with Repsol at RM113mil, which translates to US$72K/day, just around breakeven based on our estimates.

• The group’s jack-up rigs Naga 3 and Naga 4 have commenced in June this year, with Naga 3 covering 5 firm wells with options for 6 more wells. Naga 4 involves only 2 firm wells with options to extend to 3 more wells.

• As the drilling of a well could take up to 40 days, the firm charter for Naga 4 may be less than 3 months while Naga 3 could take longer at just below 7 months. As Naga 2 is also currently on short-term charter, 2 rigs will drop out of a firm charter in 4QFY17. This means that 5 out of the 7 rigs in the fleet will be operational post-3QFY17, which will further extend the group’s losses.

• Against the backdrop of these persistent losses against a backdrop of a bleak market outlook, we view the 36% share price discount to its estimated diluted book value as justified.

Source: AmInvest Research - 23 Aug 2017