Results

• Below Expectation: 3QFY14 Core profit increased by 10% qoq, bringing 9MFY14 to RM180m, making up 66% and 69% of HLIB and consensus full-year estimates, respectively.

Deviations

• Despite full contribution from Naga 5, higher than expected tax rate and lower margin from oilfield services have resulted in the shortfall against our expectations .

Highlights

QoQ, 3QFY14 revenue increased by 7% mainly due to full quarter utilisation of Naga 3 coupled with additional contribution from new hy draulic workover units, GAUT 6 which commenced operation in Aug 14. EBIT margin rebounded from 26% to 29% after Naga 3 finished a scheduled repair to a few of its ballast tanks in May 14 with full-quarter utilisation.

To recap, Naga 6 was awarded US$46.5m worth of contract from Petrovietnam to drill four firm wells and three optional wells. All six drilling rigs will be fully utilised in 4Q14. On the other hand, oilfield service remains weak due to soft demand but expect to improve going forward.

After the recent acquisition of Naga 6 and 7, a total of 8 rigs will be operating in FY15. Naga 7 will be delivered in Dec 14 and Naga 8 in Sep 15. Net gearing is expected to remain comfortable at 0.4x by end of FY14, which still provides room for asset acquisitions .

According to Pareto Securities, drilling composes ~50% of E&P total costs. I n the declining oil price environment, exploration activities will tend to be impacted first with number of drilling decreasing. Hence, any extended declining in oil price will likely dampen charter rate and utilization for jack up rate. However, UMW Oil and Gas should be less impacted as compared to other rig service providers in the region due to shortage of locally owned rigs .

Forecasts

• FY14 and FY1 5 earnings reduced by 12% and 14% respectively after factored in higher tax rate and readjust downward average charter rate from US$147k/day to US$142k/day in FY15 to reflect pressure from declining oil price.

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 reduced from of RM3.29 to RM2.90 based on unchanged 16x FY15 earnings, post earnings adjustment.

Source: Hong Leong Investment Bank Research - 25 Nov 2014