Results

• Above expectations: 2Q17 core loss came in at RM51m, bringing 1H17 core loss to RM155.1m accounting for 50.7% of HLIB and 60.7% of streets’ estimates. We consider the results above our expectation (in line with consensus) as we expect lower loss in 2H17.

Deviations

• Lower than expected rig operating costs.

Dividend

• None.

Highlights

• YoY : The group posted narrower core loss of RM51m in 2Q17 due to higher number of rigs in operation upon charter of new contracts and lower operating expenses due to cost cutting. It was partially offset by lower charter rates of new rig contracts due to weak rig market.

• QoQ : Core loss halved mainly underpinned by significant increase in rig utilisation rate upon commencement of new charter contracts.

• 1H17: Lower loss of RM155.1m was posted mainly attributed to lower operating expenses due to cost cutting. This was partially offset by lower overall charter rate secured for new contracts amidst weak rig market.

• The group has also announced RM113m (1+1 year) contract for Repsol utilising Naga 5. It would increase rig utilisation for the group towards end of 2017.

• The RM1.8bn proposed rights issue (30 sen/rights) would be tabled in upcoming EGM of the company on 25th Aug 2017 and completion of the deal would be by end Oct 2017.

• There would be 2 major scenarios for the rights issue: (i) all existing shareholders subscribing for the rights and (ii) only PNB subscribing to its entitled rights up to 38% of enlarged share base post rights issue subscription while financing the remaining funding gap by subscribing to RCPS by UMWOG.

• Regardless of the scenarios, share base would increase from 2.2bn shares to 7.0bn shares on fully diluted basis (before accounting for dilution in warrant issued) after including dilution impact of RCPS conversion into share for 2 nd scenario.

Risks

• Global recession hitting O&G price; High asset cash cost;

Forecasts

• Our forecasted loss is reduced to RM257/104/73m from RM306/165/97m previously for FY17/18/19 to account for higher rig utilisation and lower operating costs.

Rating

HOLD ( ↔ )

• We agree that the worse is over for UMWOG due to expectation of improvement in rig utilisation, the rights issue would keep the company as going concern in the medium term.

Valuation

• Our TP is reduced to RM0.32 (from RM0.72 previously) pegging 0.6x FY18 PBV based on fully diluted (excluding warrant dilution impact) BVPS to account for the dilution impact of the incoming rights issue.

Source: Hong Leong Investment Bank Research - 23 Aug 2017