Highlights

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

• The company incurred RM982m asset impairment loss in 4Q17 due to change in daily charter rate (DCR) assumption and WACC. The reasons for change in assumptions are due to slower than expected recovery in DCR and change in capital structure of the company post rights issue.

• YTD rig utilisation rates have improved from 21% in FY16 to 70% in FY17 on the back of stabilization of crude oil prices due to OPEC production cut. However we expect that rig utilisation rates will fall to c.60% in 1Q18 as Naga 2 is warm stacked and Naga 4 is undergoing Special Periodical Survey and will only start its contract from 2Q18 onwards. Nevertheless, we understand that management is targeting rig utilisation rates in FY18 to at least match the level in FY17.

• 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 and provide significant boast to the DCR.

• For 2018, we understand that at least 12 jack-up rig contracts are available for tender in Malaysia. This is positive for UMWOG as being one of the only two local players in the industry, 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 33 rig contract bids (of which 21 is in Malaysia) worth a total of US$812m, indicating potential winning of more rig contracts by the group.

Forecasts

• Unchanged.

Risks

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

Rating

BUY ↔

• Following latest outstanding quarterly result, we opine that earnings outlook of the company has improved significantly and UMWOG is a major beneficiary of steady jack-up rig demand by Petronas Group given its role as the largest domestic jack-up rig owner. Moreover, recent share price correction has made valuation of the stock more attractive.

Valuation

• We maintain our BUY call with TP maintained at RM0.44 (pegged to unchanged FY18 BVPS of 0.8x).

Source: Hong Leong Investment Bank Research - 1 Mar 2018