News

• The group has replied to queries by Bursa Malaysia on the announced deal to dispose its 50% stake in Naga 1 drilling rig to JDC for cash consideration of US$1.7m (RM7.4m).
• It has clarified that the proposed disposal would incur a loss of RM4.7m after accounting for RM12m cost of spares on board on the rig while BV of the rig is nil. Financial Impact
• We are positive on the deal as it would help to ease UMWOG’s cash burn on the rigs (on rig maintenance and CAPEX for refurbishment) on a yearly basis.
• In addition, the rig is old with age of 43 years, which makes it less competitive compared to younger fleet with higher specifications.
• The exercise would also help the group to avoid the cost of dry docking for Naga 1 scheduled in Oct 2017 with an expected cost of US$35.5m.
• Post the disposal; the group would not retain any stake in the rig.

Pros/Cons

• Rig disposal would improve the operating cash flow of the rig.
• Post disposal, opportunities from sharp recovery in rig market would be lesser with lesser fleet size.

Forecast

• Maintain forecast.

Rating

SELL (↔)

• Rig market remains weak for 2017 with supply hang still present. Charter rates would still continue to be pressured in our opinion and the proposed deal to acquire Orkim and Icon with rights issue is in our opinion dilutive for existing shareholders and would paint negative sentiment on the group.

Valuation

• We maintain our SELL call with TP at RM0.57 (pegged to unchanged FY17 PBV of 0.7x.

Source: Hong Leong Investment Bank Research - 04 May 2017