Results

Below Expectation: FY13 Core profit registered RM167m, making up 89% and 97% of HLIB and consensus full-year estimates, respectively.

Deviations

Lower than expected margin from drilling services, partly due to lower utilisation from UMW GAIT I and UMW GAIT III.

Highlights

QoQ, 4QFY13 revenue increased marginally due to improved revenue from UMW Naga 3 as its utilisation returned to normalcy since Oct 13, partly offset by significantly lower utilisation rate of UMW GAIT I and GAIT III. To recap, Naga 3 experience a week’s downtime in Sep 13 that was caused by damage to a few of its many ballast tanks while preparing for an in-filed move. In addition, full quarter revenue from UMW Naga 4 which commenced in Apr 13 also helps to drive drilling services revenue.

On oilfield service, higher revenue from OCTG threading and pipes repair services in Thailand was insufficient to offset the revenue dropped caused by machine downtime in Labuan.

Naga 5 and 6 are expected to commence in FY14. After the recent acquisition of Naga 6 and 7, a total of 8 rigs will be operating in FY15. Naga 6 is expected to be completed and delivery in Sep 1, Naga 7 in Dec 14 and Naga 8 in Sep 15. Net gearing expect to remain comfortable at 0.4x at tend of FY14, which still provides room for asset acquisitions.

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 awards to accelerating in next 2 years with the early call for tender by end of 2013.

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 (HOLD:TP:1.02).

Forecasts

Unchanged pending analyst briefing later today.

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 and TP of RM4.12 based on unchanged 20x FY15 EPS of 20.6 sen/share. Despite the positive news for the drilling sector, we believe current price has already largely factor in its fundamentals.

Source: Hong Leong Investment Bank Research - 25 Feb 2014