Results

In line: 1QFY14 Core profit registered RM54m, making up 19% and 19.5% of HLIB and consensus full-year estimates, respectively.

Deviations

We deem the 1QFY14 result inline as we expect strong 2H14 due to delivery and contribution from Naga 5 (delivered in Apr 14) and Naga 6 (around Sep 14).

Highlights

QoQ, 1QFY14 revenue fell due to lower utilisation of hydraulic workover unit – GAIT 5, lesser commission income from agency sale of specialised drilling equipment coupled with absence of amortisation of deferred income on UMW Naga 2’s mobilisation fees.

On hydraulic workout business, we expect utilisation rate to improve going forward (we have assumed average of 70% utilisation in FY14) as UMW GAIT 3 has commenced with a 2+1 years contract with Petronas in Mar 14 coupled with GAIT 2, 5 and 6 which will continue to operate for the rest of FY14. On the other hand, oilfield service remains weak due to machine downtime in Labuan.

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 14, Naga 7 in Dec 14 and Naga 8 in Sep 15. Net gearing expect to remain comfortable at 0.4x at end 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:1.87) 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 - 20 May 2014