Results

• Below expectations: 1QFY15 PATAMI fell by 40% YoY to RM32m, making up 8.5% and 11% of HLIB and consensus full-year estimates, respectively.

Deviations

• Mainly due to lower charter rate (as a result of higher discount given to existing clients amidst plunged in oil price) and additional expense from Naga 7 (due to early termination of contract).

Highlights

• QoQ, 1QFY15 revenue reduced by 5% mainly due to lower time charter rates for most of the rigs arising from discount given to existing clients with lower utilisation rate on Naga 5 due to mobilisation period. EBIT recorded sharper fall (-46% QoQ) as a result of lower charter rate and additional expense from Naga 7 (due to early termination of contract).

• Among its port folio, 5 rig’s contracts (Naga 2, 3, 5, 6 & 7) will expired in FY15 and it expects lower utilisation rate as compared to FY14. We have reduced our assumption on average utilisation rate from >90% to 75% in FY15.

• In view of the softening charter rate, we have al ready factored in lower average charter rate of US$142k/day in FY15 and US$134/day in FY16.

• The company is bidding for 18 drilling contracts in local and oversea worth about RM3bn. Naga 8 is expected to be delivered in Sep 15.

• In view of Petronas capex cut (15-20%) and reduction in operational expenditure, asset owners such as drilling, OSV and fabrication service providers will be negatively impacted.

• According to channel check, rig service providers started to see pressure on charter rate with average 5% to 15% reduction and number of new tender also dropped by 50%. Hence, we remain cautious on UMW Oil and Gas given pressure on charter rate amidst lower oil price.

Forecasts

• FY15 and FY16 earnings reduced by 48% and 26% respectively after factored in lower utilisation rate on the drilling business.

Risks

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

Rating

SELL

Positives

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

Negatives

• : Increased competition.

Valuation

• We maintain our SELL call with TP adjusted from RM2.50 to RM1.85 based on unchanged 14x FY16 P/E post earnings downgrade.

Source: Hong Leong Investment Bank Research - 15 May 2015