UMW Holdings; Hold
Price Target: RM12.70; UMWH MK

UMW has made an announcement on the proposed listing of its wholly-owned subsidiary, UMW-OG, on the Main Market with expected completion by 4Q13. The proposed IPO will comprise a public issue of 611.8m new shares and offer for sale of up to 231.4m shares, totaling 843.2m shares.

At the same time, UMW intends to undertake the following internal reorganisation exercise: i) UMW will subscribe for 90m shares (RM45m share capital) in UMW-OG, ii) UMW-OG will then acquire 85-100% equity interest in UMV, USV and UJD for cash consideration of RM44.5m; and iii) URA (wholly-owned subsidiary of UMW-OG), UMV and USV will acquire other subsidiaries and associated companies (including Naga 1-4 drilling rigs) from UMW Corp and UMW Petropipe for RM105.5m. UMW-OG also intends to settle its intercompany liabilities to UMW through listing proceeds and new shares issuance.

The O&G segment has shown better earnings performance for the past 2 years given the consistent contract flows and contributions from rigs in operation. This is reflected by its improving revenue base from RM380m in FY10 to RM846m in FY12. After making net losses of RM46m in FY10, UMW was able to turnaround and achieve net profit of RM79m and RM75m in FY11 and FY12 respectively. Based on our estimates, our FY14 O&G net profit forecast of RM170m could imply a market cap of RM2.38bn for UMWOG pegged to 14x FY14 PE. The stronger O&G earnings in FY13F-15F is expected to be supported by Naga 4’s full-year contribution and improving day rates.

From the announcement, 108.1m shares from UMW-OG’s IPO are reserved for applications by UMW shareholders. Each entitled UMW shareholder who applies will be guaranteed a minimum allocation. The IPO is also expected to mainly impact UMW’s balance sheet as repayment of debt could improve gearing and increase its net asset base. The pared-down borrowings would result in interest savings, and hence improve earnings. We are positive on the listing as it would enable further expansion of its O&G business. Maintain Hold with SOP-based RM12.70 TP.

Source: HwangDBS Research - 17 May 2013