News

• UMW Holdings has announced that it will undertake bonus issue of 1,204.8m of redeemable preference shares (RPS), issued at par value of RM0.01, to its shareholders (1:1 basis) of which its redemption would be satisfied in the form of UMW-OG shares. This would result in UMWH owning none of UMWOG shares post the exercise but with common shareholders.
• At the same time, UMW-OG has proposed to acquire 42.3% stake in Icon Offshore (ICON) from Ekuinas for purchase consideration of RM248.9m (RM0.50/share) via share issuance of 311m new shares at an issue price of RM0.80/share and ORKIM (product tanker owner) for cash consideration of RM472.7m. The ICON acquisition will trigger MGO for remaining shares whereby ICON’s shareholders can opt for either payment in form of UMW-OG shares or cash.
• The company has also proposed renounceable rights issue at RM0.50/rights share with free warrants (exercise price not yet fixed),
• The rights issue would raise up to circa RM1.8bn, to be utilised for working capital, repayment of borrowings & repayment for bridging facility to finance ORKIM acquisition for RM472.7m (ref Fig 4). Financial Impact
• Overall we opine that the deal is value dilutive for UMWOG. Limited business synergies are expected from the merger deal as the costs of the 3 businesses do not overlap significantly.
• UMWOG shares will be issued at a discount (implied offer PBV: 0.6x vs. current PBV: 0.7x) to buy ICON at a premium (implied offer PBV: 0.8x vs. current PBV: 0.7x).
• The acquisition valuation of ORKIM appears to be rather steep at trailing FY15 valuations - 15.3x PER, 3.6x P/NA and 11.8x EV/EBITDA.
• Post the completion of exercise, BVPS of the enlarged entity will range from RM0.83-0.85/share (ref Fig 6) from existing RM1.54/share, implying 40% dilution or higher.
• Only simple majority (50%+1 share) is needed for shareholders’ approval and given PNB and Ekuinas large shareholding in in UMWOG and ICON respectively, we believe the deal will go through.

Forecast

• Unchanged, pending completion of exercise.

Rating

SELL (↓)

• Near term earnings outlook remains bleak with jack-up rig market still depressed with share price overhang expected to emerge post the deal announcement. We also opine that limited synergistic benefits to be realised from the merger exercise due to their business nature.

Valuation

• TP is reduced to RM0.65 (from RM0.91) as we lower target FY17 PBV multiple to 0.5x from previously 0.7x to account for (i) potential share price overhang upon anticipation of announcement of share distribution; (ii) limited synergistic benefits from the merger; and (iii) large dilution impact expected from the merger

Source: Hong Leong Investment Bank Research - 20 Jan 2017