Stock Name: UMW
Company Name: UMW HOLDINGS BHD
Research House: RHB

UMW Holdings Bhd
(Oct 5, RM6.75)
Maintain market perform at RM6.73 with fair value of RM7.27: The company announced on Oct 4 that its 85%-owned Naga One semi-submersible rig (semi-sub) contract with Petronas Carigali Sdn Bhd (PSCB) has been extended for another five years at a total contract value of US$250 million (RM778 million). The previous contract (signed in June 2006) for 20 firm wells is expected to be completed by end-2010. The new contract has yet to stipulate the number of new wells.

The new contract translates to a per day charter rate of US$136,000, 63.1% higher than the previous US$84,000 guided for by management for the initial contract. However, the rate is still below the market rate for semi-subs, which is in the range of US$300,000 to US$400,000 per day depending on the rig zone. The significant discount could be because the charter is a long-term one, instead of the current short-term rolling one.

While the extension is unsurprising, its duration is longer than the two-year timeline the management had guided for. Given the uncertainty the division has faced thus far, the long-term charter is a welcome change. Even though it is significantly below the average market rate, it will provide some stability to the division's earnings.

The company announced that Naga Two reached its destination at the Ujung Pangkah field on Sept 20, while the technical assistance cooperation agreement in relation to the rig is expected to be concluded by November. Naga Three is close to delivery, however, contract negotiations are still ongoing and management hopes it can be chartered out by FY11.

We maintain our forecasts at this juncture, given that our earnings estimates already incorporate around US$130,000 per day for the charter rate from Naga One. In the near term, the oil and gas division is likely to be weak unless the company can turn around the other associates significantly by FY11.

We believe the stock is close to fairly valued at this juncture as the moderation in auto sales in 2HFY10 could spill over to FY11 as well. We will review our call on the stock should automotive sales prove to be stronger than our estimates. As such, although we are maintaining our fair valuations at RM7.27 per share, we have downgraded the stock to 'market perform' in our last strategy piece. ' RHB Research Institute, Oct 5


This article appeared in The Edge Financial Daily, October 6, 2010.