Highlights

• We attended UMWOG’s analyst briefing and walked away feeling positive. Key highlights as below:

• To recap, 3Q17 bottom-line returned to black as rig utilisation rates improved to 90% (from 68% in 2Q17). This was the first quarterly profit posted by the company in the recent 2 years.

• YTD rig utilisation rates have improved from 26% in 1Q17 to 90% in the latest quarter on the back of stabilization of crude oil prices due to OPEC production cut.

• Current average daily charter rate is hovering around US$70,000/day. We expect the rate to stabilize around this level in the near term as the supply glut of jack up rigs still persists while no significant improvement is seen in the near term. The number of new rigs to be delivered in 2018-2020 is expected to be around 98 units, which is c.18.1% of the number of global jack-up rigs available globally.

• Notwithstanding the above, more than 50% of the global rig fleet are aged more than 30 years, indicating that significant number of rigs could be scrapped in the longer run.

• For 2018, we understand that at least 12 jack-up rig contracts will be needed in the Malaysian rig market. This is positive for UMWOG being one of the only two local players in the industry. We believe the company stands a fairly good chance to secure sufficient amount of contracts to replenish its order book.

• At this juncture, the group is participating in 25 rig contract bids (of which 15 is in Malaysia) worth a total of US$802m, indicating potential winning of more rig contracts by the group.

• Management also guided continuation of cost rationalisation exercise and is targeting to cut another RM30m costs in FY18.

Forecasts

• Unchanged.

Risks

• Global recession hitting O&G price; High asset cash cost; Petronas’ further CAPEX and OPEX cut.

Rating

BUY ↔

• Debt maturity overhang and rights issued completion would provide catalyst for the share price while earnings outlook appears to be more encouraging in 2018.

Valuation

• We maintain our BUY call with unchanged TP of RM0.38 (pegged to unchanged FY18 BVPS of 0.7x).

Source: Hong Leong Investment Bank Research - 28 Nov 2017