News

UMW has proposed to list its O&G division under a new company called UMW Oil & Gas Corporation Berhad (UMW OG), involving 843.18m shares offered (231.38m of existing shares and 611.8m of new shares) or 39% of the enlarged share capital of 2,162m shares of UMW OG.

Prior to the IPO exercise, the group will undertake an internal reorganization exercise (expected to be completed by 3Q13), which involved the transfer of the offshore drilling business and certain companies in the oilfield services division under UMW Holdings to UMW OG.

The whole exercise is expected to complete by 4Q13.

Financial impact

The IPO exercise will dilute O&G contributions to UMW Group by 39%, as it will only own 61% of the listed UMW OG.

Pros / Cons

The existing O&G business contributed RM78.2m in FY11 (9.4% of UMW’s profits) and RM73.8m in FY12 (8.0% of UMW’s profits. However, we do expect earnings expansion in FY13-15 due to higher charter rate for Naga 3, commencement of Naga 4 and the extension of Naga 1 at higher charter rate.

We have imputed a fair value of RM2,586.5m (based on 20x FY14 P/E) to UMW’s O&G division, translating into RM1.20/share (RM2,586.5m / 2,162m shares). FY14 P/E of O&G players in Malaysia is trading between 10x to 26x.

It will allow UMW to: 1) realize hidden value of its O&G assets; 2) improve capital structure; 3) lower O&G dependency on the group (i.e. borrowings and fund raisings); 4) allocated resource more efficiently; and 5) accelerate O&G division growth.

Risks

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

Forecasts

• Unchanged.

Rating

Sell

• Positives –
  • Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua.
  • Turnaround of Oil & Gas division and eventual listing, 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.
  • Increasing automotive competitiveness in Malaysia

Valuation

• Maintained Sell with unchanged Target Price at RM11.80 based on SOP. We believe UMW OG IPO has already been widely anticipated and priced-in (given that current implied value of the O&G division is already at 40x FY14 P/E), while we expect Toyota sales to disappoint the market.

Source: Hong Leong Investment Bank Research - 17 May 2013