Results

• Below expectations: 3QFY15 core earnings swung from profit to losses of RM24m, bringing 9MFY15 PATAMI to RM15m and making up 32% 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 plunge in oil price) coupled with downtime incurred by two of the rigs which underwent 5 years periodical survey.

Highlights

• 3QFY15 core earnings (excluded non-cash item of RM24m) swung from profit to losses of RM24m mainly due to sharp fall in drilling revenue as a result of lower time charter and utilisation rate. Lower utilisation rate also partly contributed by two of the rigs which underwent 5 years periodical survey.

• 4Q15 core earnings are likely to remain in the red due to weak utilisation rate as contracts for Naga 5 and 6 have expi red. UMW O&G currently has 4 out of 8 rigs operating (Naga 1,4,7,8) after Naga 7 and Naga 8 secured contracts recently. We estimate the daily charter rate for Naga 7 and 8 to be around US$100k/day, in line with current market rate of US$90-100k/day. Overall, we reduced our assumption of average charter rate for FY15 and FY16 by 5% and 17% to US$112k/day and US$101k/day respectively.

• At current rate of circa US$100k/day, EBITDA remain positive but in order to be P&L positive, we estimate utilisation rate need to be as high as 85%.

• We remain cautious on drilling rig providers given increasing pressure on charter rate and utilisation. We expect the situation to continue given oversupply in the rig market with declining oil price dampening hope for any recovery in the near term.

Forecasts

• We adjust our FY15 and FY16 earnings to loss making of RM10m and RM26m respectively after we factored in lower charter rate.

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 RM0.77 to RM0.69 with valuation method changed from P/E to P/B (based on 0.5x FY16 BVPS).

Source: Hong Leong Investment Bank Research - 25 Nov 2015