• Profile: UMWOG (~59% owned by PNB group) is principally engaged in: (a) the provision of drilling services for exploration, development and production wells and workover services to the upstream sector of the O&G industry (contributed 97% to FY17 turnover) in Malaysia and Southeast Asia with its fleet of offshore drilling rigs and hydraulic workover units; (b) the provision of threading, inspection and repair services for Oil Country Tubular Goods in Malaysia and overseas, with a focus on premium connections used in high-end and complex wells.

• Feeling more positive now as HLIB has a BUY rating with TP of RM0.44, or 42% upside. Tracking stabilisation of crude oil prices, we believe the worst is over for UMWOG post restructuring exercise (completed in Sep 2017) with net gearing is expected to slash to 0.3x in FY18 (from 1.4x in FY16) and turnaround to a RM16m net profit from FY16-18 core losses of RM612m in FY16, thanks to the higher rig utilisations and daily charter rates (DCR).

• Based on the positive Petronas Activity Outlook 2018-2020 report, about 7-10 jack-up rigs are required by Petronas Group of Companies and other Petroleum Arrangement Contractors (PACs). This bodes well 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 (~RM445m end Feb). Moreover, as over 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 boost to the DCR. At this juncture, the group is participating in 33 rig contract bids (of which 21 is in Malaysia) worth a total of US$812m (~RM3.16bn).
• Potential downtrend line breakout. After tumbling 38.5% from 52w high of RM0.48 (9 Jan) to YTD low of RM0.295 (6 Feb and low Bollinger band), UMWOG has been trending sideways before closing last Friday at RM0.31 (19.5% below its BVPS of RM0.385). We believe the stock is grossly oversold and ripe for a downtrend resistance breakout soon in anticipation of better days ahead.
• A decisive breakout above downtrend line near RM0.325 will likely to lift share prices higher towards RM0.355 (200d SMA and 61.8% FR) before testing our LT objective at RM0.38 (50% FR). On the flip side, key supports are situated at RM0.30 and RM0.295. A breakdown below RM0.295 will trigger further potential selldown towards 52w low of RM0.27 (24 Oct). Cut loss at RM0.28.

Source: Hong Leong Investment Bank Research - 5 Mar 2018