News

UMW O&G announced that its wholly owned subsidiary UMW Drilling 8 (L) Ltd has entered into a rig construction contract with Keppel FELS.

The value of the KFELS B Class jackup rig is US$218m. Delivery is expected by the end of September 2015. The contract is 20% payable upfront and an additional 80% upon delivery. The acquisition will be funded in part by proceeds from the recent IPO with the balance to be financed by borrowings.

Comment

The acquisition of an additional rig is within our expectation. We have assumed UMW O&G to acquire at least 2 more new rigs after IPO with net gearing remain manageable at 0.35x in FY14 which suggests more room for asset expansion.

With an assumption of daily charter rate of US$150k and net profit margin of 30%, we expect it to contribute ~RM50m to the company bottomline. We maintain our forecast as we have already factored in the deliveries of Naga 5 and 6 in FY14 and Naga 7 in FY15.

Domestically, there is a shortage of locally owned rigs. As of Sept 2013, there are 16 jack-up rigs operating in Malaysia but only 2 are locally owned (Naga 3&4). Drilling into detail, 14 foreign jacks up rig contracts are expects to expire within 1-2 years with 3 in 2H2013, 4 in 1H2014, 5 in 2H2014 and 2 in 2015. Hence, we expect tender and contract award to accelerating in next 2 years.

We gather from management that the construction of the Naga 5 is on track to delivery in May 14. To recap, the company has secured US$7m contract for Naga 5 from Nido Petroleum. The contract will commence in Jun 14 with 6 weeks duration. We also understand the company is currently in negotiation to secure a second contract for Naga 5.

UMW O&G is the best proxy to benefit from rigs localisation. Alternative drilling related stocks stand to benefit from massive drilling activities are Perisai (BUY, TP:1.93) and Scomi Energy (BUY:TP:1.02).

Forecasts

Unchanged.

Risks

• Global recession hitting O&G price;
• Technology advancement;
• Relaxation of Petronas’ domestic policy.

Rating

HOLD

Positives: Market leader in domestic drilling sector with strong balance sheet to expand further.

Negatives: Increased competition for the markets.

Valuation

We maintain our HOLD call with unchanged TP of of RM3.92 based on 20x FY15 EPS of 19.6 sen/share. Despite the positive vibes for the drilling sector, we believe current price has already largely factor in its fundamentals

Source: Hong Leong Investment Bank Research - 7 Feb 2014