Highlight

UMW O&G’s 4Q analyst briefing was hosted by Rohaizad Darus, CEO and attended by more than 15 fund managers and analysts. Drilling outlook remains robust for next two years due to increasing exploration and production activities in the region which is underpinned by rising charter rate.

We understand the company has paid some premium price for Naga 6 and 7 due to its early delivery (in Sep 14 and Dec 14 respectively). We believe this is a right strategy to leverage on the high demand for jack ups in Malaysia and Southeast Asia as many existing contracts are going to expire over the next 2 years.

After the recent acquisitions of Naga 6 and 7, a total of 8 rigs will be operating in FY15. The company is aiming to add at least one rig per year.

Naga 6 and 7 are expected to deploy for short-term contract to leverage on the rising charter rate, while Naga 8 will most likely to charter under long term contract.

Comment

The expanded fleet is well positioned to leverage on the asset localisation theme in the domestic drilling sector.

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.

Naga 6 is expected to be completed and delivery in Sep 14, Naga 7 in Dec 14 and Naga 8 in Sep 15. Net gearing is expected to remain comfortable at 0.4x at the end of FY14, which still provides room for asset acquisitions.

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).

Forecast

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 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 - 26 Feb 2014