Investment Highlights

• We maintain our HOLD call on UMW Oil and Gas Corp (UMWOG) with an unchanged fair value of RM0.30/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 2.5x 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.

• The shares will trade ex-rights on 25 September while the trading rights will commence 26 September and cease on 3 October.

• The theoretical value of the warrants, even though the mother share price is currently below its exercise price, works out to 16 sen given that the expiry period is 7 years. Including the potential value of the warrants, we estimate that the trading rights could be valued at 4 sen. However, if the ex-rights share price drops below RM0.30, the trading rights will be essentially zero.

• Currently, 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 being utilised as Naga 5’s short term charter with Petrofac was recently completed.

• However, Naga 5’s 1-year charter (with another 1-year extension) with Repsol commences in mid-September this year 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 33% share price discount to its estimated diluted book value as justified.

Source: AmInvest Research - 11 Sept 2017