Investment Highlights

• We maintain our HOLD call on UMW Oil and Gas Corp (UMWOG) with an unchanged fair value of RM0.30/, based on a 25% discount to the impaired book value of RM0.39/share.

• As a comparison, Malaysia Marine & Heavy Engineering, which has a net cash of RM0.40/share, is currently trading at half its book value.

• We have reduced FY18F losses by 20% on improved margin assumptions while largely maintaining FY19F loss of RM28mil.

• Excluding RM982mil impairment losses for the group’s 7 rigs, UMWOG’s FY17 loss of RM150mil was better than expectations, 24% below our forecast and 11% below street’s. As expected, the group did not declare any dividend due to the losses.

• UMWOG’s 4QFY17 revenue rose 6% QoQ to RM192mil as the number of rigs on active charter remained at 7, which translates to a utilization of 95%. However, the group’s core net profit still halved to only RM2mil, barely breaking even.

• As Naga 5 rig’s 1-year charter (with another 1 year extension) commenced in mid-September this year, 7 rigs were in operation in 4QFY17. However, the charter from Repsol at RM113mil, translating to US$72K/day, is just around breakeven based on our estimates.

• The group’s rig utilisation outlook remains uncertain as 4 rigs could drop out of charter in 1QFY18. The Naga 2 charter, which was scheduled to expire by the end of November 2017, continued until mid-December this year while Naga 6 was scheduled to drop off charter by end-December 2017.

• The charters for Naga 4 and Naga 3 will also 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 last 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 utilisation at these rates will mean that UMWOG will continue to be just breaking even, notwithstanding the group’s efforts to draw further cost efficiencies with a stronger credit profile amongst suppliers and financiers. Against the backdrop of weak earnings prospects shackled to a bleak market outlook, we view the 15% share price discount to its book value as justified.

Source: AmInvest Research - 28 Feb 2018