News

• UMWOG has terminated the agreement to acquire ICON and ORKIM.

• It has instead proposed a 14-for-5 rights issue for shares held by entitled shareholders with rights priced at RM0.30, in order to raise RM1.8bn. The theoretical ex-price is fixed at RM0.395)

• The rights are also attached with free warrants (1 warrant for every 4 rights) with exercise price fixed at RM0.395 (based on theoretical ex-price).

• Structure of the deal is dependent on 2 scenarios: 1) If shareholders (other than PNB) fully subscribe to the rights, PNB will only be subscribing for its entitled portion (45.5%). 2) If shareholders (other than PNB) do not subscribe to the rights, PNB would fund the rights without resulting in its shareholding exceeding 65% (post the exercise), while the remaining unsubscribed rights being converted into RCPS-I (issue price of RNM0.30/unit with 5 years tenure and 8% annual premium and non-compounded). The RCPS-i is also attached with warrants based on 1-for-4.

Financial Impact

• Compared to previous deal of acquiring ORKIM and ICON, we are positive on the new proposal as it removes the market overhang on the valuation and lack of synergy from the deal.

• On a fully diluted basis, both scenarios would result in the same amount of dilution impact while both would not result in different earnings profile of the group. (refer to Fig 2)

• The repayment of borrowings post this corporate exercise would result in circa RM60m interest cost savings while reducing the gearing from 1.8x to 0.49x on full basis regardless of the scenarios.

• In addition, the repayment of loans post rights issue would release US$125m worth of cash pledged for its existing loans. This would in turn be utilized to repay its shareholders’ loans.

Pros/Cons

• The exercise would lower the group’s short term liquidity risk.

• Significant dilution for existing shareholders.

Forecast

• Maintain forecast.

Rating

• HOLD ( )

• Proposed new deal removes share price overhang of acquisition of ORKIM-ICON. However, outlook of the overall rig market remains weak.

Valuation

• We upgrade the stock to HOLD from SELL with TP raised to RM0.72 from RM0.57 previously based on higher PBV multiple of 0.8x from 0.7x

Source: Hong Leong Investment Bank Research - 5 May 2017