Investment Highlights

• We maintain our HOLD call on the soon-to-be rebranded UMW Oil and Gas Corp (UMWOG) with unchanged forecasts and fair value of RM0.30/, based on a 40% discount to the diluted book value of RM0.50/share.

• As a comparison, Malaysia Marine & Heavy Engineering, which has a net cash of RM0.41/share but expected to register losses this year, is currently trading at half its book value.

• UMWOG held an analyst briefing yesterday, which provided these salient takeaways:

• The group’s rig utilization rate is likely to reach over 90%, slightly higher than the 90% achieved on 3QFY17 vs. 68% in 2QFY17 and 26% in 1QFY17. However, this offers a small comfort as we note that UMWOG’s 3QFY17 net profit of RM3mil would have reversed into a minor loss, if lumpy warranty recoveries of RM7mil (categorised as other operating income) were excluded.

• The Naga 2 charter, which was scheduled to expire by the end of November 2017 may continue until mid-December this year while Naga 6 will be off charter by end-December 2017.

• However, the charters for Naga 4 and Naga 3 will expire by January 2018 and June 2018 respectively. Also, the initial 18-month charter for Naga 8 will end in March 2018 if Hess does not exercise its 1-year option.

• 12 rig charters are expected to materialize in 2018 vs. 5 this year. However, these may be short-term charters to replace current contracts which are expiring in 2018.

• The group’s average rig charter rate of US$70K appears to have bottomed out with Brent crude oil price above US$60/barrel. Full utilization at these rates will mean that UMWOG will just barely be breaking even, notwithstanding the group’s efforts to draw further cost efficiencies with a stronger credit profile amongst suppliers and financiers.

• The group’s RM1.8bil rights issue and recapitalization/debt restructuring exercise was completed on 25 October this year, which will mean a one-off transaction costs in 4QFY17. Additionally, UMWOG may also experience further rig impairments from lower DCF valuations as the group’s WACC will have risen from a higher debt-to-equity ratio and increased interest costs, partly offset by higher utilization assumptions.

• The group’s new name and rebranding exercise will commence after its AGM in May 2018, but the Naga rig brand will be retained.

• With persistent losses still a possibility against the backdrop of jack-up charter rates which are just about breaking even, we view the 40% share price discount to its estimated diluted book value as justified.

Source: AmInvest Research - 28 Nov 2017