News

UMW Oil & Gas division (O&G) has received a Letter of Award from Petronas Carigali (PCSB) for the Provision of Naga 4 Jack-up Drilling Rig for PCSB’s domestic operations within Malaysia waters.

Valued at US$157.68m (RM477.77m), the contract duration is 3 years from the day it commence operations with additional 2 years option for renewal.

To recap, Naga 4 is an independent-leg cantilever mobile offshore self-elevating drilling rig that has drilling capability of 30,000 feet and has a rated operating water depth of 400 feet. Financial impact

Similar margins as compared to Naga 3, leading to strong contribution to O&G division.

Pros / Cons

As per management’s previous guidance, the newly delivered Naga 4 is in high demand due to the increasing exploration activities in Malaysia water. However, the contribution of Naga 4 has fall slightly behind our initial expectations of 1st April 2013.

The contract value is valued at US$52.56m pa (US$157.68m/3), which is within our expectations of RM160m pa, slightly higher than previous Naga 3 contracts of US$52.5m pa.

We estimated Naga 4 to fetch net margin of 25%, enhancing the earnings and the overall valuations for UMW’s O&G division. UMW is restructuring the O&G division and likely to list the division within 2013.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.

Forecasts

Unchanged, as we have already included Naga 4 contributions into our forecasts.

Rating

Sell

• Positives –
  • Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua.
  • Turnaround of Oil & Gas division, as well as strong sales from Equipment division.
  • Expanding reach of Manufacturing & Engineering division into fast growing China and India.
• Negatives –
  • High crude oil prices affecting margins of its oil based products i.e. lubricants.
  • Tightening of bank’s lending rules.
  • Increasing automotive competitiveness in Malaysia.

Valuation

Maintained Sell with unchanged Target Price at RM11.80 based on Sum-of-Parts. We believe the news has been largely anticipated and within expectations. However, 2013 Toyota sales are likely to disappoint the market.

Source: Hong Leong Investment Bank Research - 11 Apr 2013