Highlights

The listing of UMW OG will only include 4 Naga drilling rigs (1 submersible and 3 jack-ups), 4 Gait HWUs (hydraulic workover units), OCTG (oil country tubular goods) services and power supplies solutions. The other remaining O&G businesses will be re-categorized to UMW’s other segment.

Management indicated that most of the injected businesses are making good profits. The audited accounts showed UMW OG making RM78.2m in FY11 and RM73.8m in FY12 (the lower yoy earnings was due to the refurbishment of Naga 1, making it out of business for 9-mth).

We believe bulk of the earnings was attributed to Naga drilling rigs, which fetch around 25-30% margin.

Contract Start - Contract End - Contract Value
Naga 1: Nov 2010 - Aug 2018 - US$250m + US$130m
Naga 2: Sep 2010 - Jun 2014 - US$183.1m
Naga 3: Jan 2010 - Mar 2014 - US$41.5m + US$105m
Naga 4: Apr 2013 - Apr 2016 + 2 yrs option - US$157.7m

The market has been expecting UMW OG to raise US$500m from the IPO. We expect UMW OG to be on acquisition spree to purchase another 2 drilling rigs which cost US$200m each unit.

Domestically, the ETP driven RM300bn Capex spending to enhance exploration, EOR and marginal fields requires a massive level of drilling activity which we believe the markets underestimate and currently there are difficulties in securing enough quality drilling rigs to meet requirements.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• 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, 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 Sum-of-Parts. We believe the market has already priced in UMW OG IPO, while we expect Toyota sales to disappoint the market, as Toyota sales dropped 15.64% ytd.

Source: Hong Leong Investment Bank Research - 20 May 2013