News

UMW announced that its 85% owned UMW JDC Drilling, has received a contract extension letter from Petronas Carigali for the provision of Semi-Submersible Drilling Rig “Naga 1”.

The current contract has been extended to 19 Aug 2016 (from 12 Nov 2015), after Naga 1 undergone upgrading exercises, with the existing contract terms remained the same.

In addition, another contract extension for a further period of 2 years was awarded commencing from 20 Aug 2016. The contract is valued at US$130m (RM396.5m).

Financial impact

Higher margins from the contract extension. However, the effective contract period is not within our forecast (2016).

Pros / Cons

We are positive with Naga 1 contract extension, which is at a higher value of ~RM200 p.a. vis-à-vis Naga 1 existing contract of ~RM150 p.a. and recently awarded Naga 4’s ~RM160m p.a.

The extension contract net margin may fetch around 35% as compared to UMW’s existing contracts at 25%. The higher margins will enhance UMW earnings and overall valuations for UMW’s O&G division. UMW is restructuring the O&G division and likely to list the division within 2013.

To recap, Naga 1 is a 50:50 JV between UMW JDC Drilling and Japan Drilling Co, which means UMW’s effective stake is 42.5%.

Risks

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

Forecasts

Unchanged, as the higher valued contract extension is only effective in 2016.

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 - 24 Apr 2013