Investment Highlights

• We maintain our HOLD call on the soon-to-be rebranded UMW Oil and Gas Corp (UMWOG) with unchanged fair value of RM0.30/share, 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 RM0.41/share but expected to register losses this year, is currently trading at half its book value.

• Following UMWOG’s analyst briefing yesterday, we have turned around our loss forecasts to a FY18F net profit of RM16mil, FY19F of RM63mil and FY20F of RM88mil on a 30% cut in depreciation charge assumptions following the group’s impairment of RM982mil.

• While earnings prospects have improved given the group’s 4QFY17 kitchen-sinking exercise, we estimate that the group will suffer a 1QFY18 loss of RM60mil given that 3 of its rigs will be out of charter, leading to a rig utilisation rate of 57% from 95% in 4QFY17.

• Nonetheless, even with the turnaround in the group’s earnings outlook, UMWOG’s greatly expanded share base, which surged 3.8x to 8.2bil shares (including Islamic redeemable convertible preference shares) following its recent rights-cum-debt restricting exercise, will mitigate any substantive diluted EPS accretion.

• Assuming average daily charter rates rise to US$80K from US$70K in 4QFY17, we estimate that UMWOG’s FY19F diluted EPS will only rise by 0.3 sen to 1.1 sen, translating a still high PE of 29x.

• We highlight the key takeaways from the briefing:

• Naga 2 and Naga 6 will be warm stacked throughout 1QFY18 while Naga 4 will undergo special periodical survey after its recent completed job and commence on its new project with Conoco Philips by end-April 2018.

• Naga 8 will likely secure a 1-year extension to its existing contract with Hess next month.

• The group’s average rig charter rate of US$70K appears to have bottomed out with Brent crude oil price above US$60/barrel. However, upside momentum appears sluggish with local daily charter rates at US$70k-75k while international rates at US$65k-70k.

• The recent impairment exercise for the 7 rigs has assumed an average charter rate drop of 29% for the next 5 years with rates now at US$65K-70K for 2018-2019, US$70K-75K in 2020-2021 and gradual increase thereafter, together with utilisation rate of 80% and weighted average cost of capital increase of 0.2ppt to 9.7% from the rights issue.

• Against the backdrop of weak earnings per share prospects shackled to a still struggling jack-up charter market outlook, we view the 18% share price discount to its book value as justified.

Source: AmInvest Research - 1 Mar 2018