UMWOG reported its 6th consecutive quarter of headline losses as the group continued to suffer from the challenging operating environment, impacted by low daily charter rates (DCR), ample supply and low demand for drilling rigs. Fundamentally, we continue to see few catalysts to re-rate UMWOG. We maintain our HOLD rating with an unchanged TP of RM0.63 based on 0.5x 2017E P/BV.

Headline Net Losses Narrowed on High Loss Base

UMWOG reported headline net losses of RM104.1m in 1Q17, which was a sharp rebound from losses of RM918.4m in 4Q16 due to kitchen-sinking exercise in previous quarter. After excluding the RM0.2m gain on PPE disposal and RM1m forex loss, core net losses came in at RM103.3m which accounted for 46% and 39% of our and consensus net losses estimates.

Results Analysis

Core net losses widened 11.9% yoy to RM103.3m in 1Q17 on the back of weaker revenue, which declined 15.3% yoy mainly due to the lower DCR. Drilling rigs utilisation was flat yoy at 25%. Sequentially, revenue increased 38.9% qoq to RM74.3m, which led to core net losses narrowing by 25.2% to RM103.3m as drilling rigs utilisation improved from 20% to 25%.

Still Premature to Hope for a Meaningful Recovery

We believe it is still premature for a re-rating as the outlook remains uninspiring. Although all of its NAGA rigs currently have a contract in hand, UMWOG would only achieve 54% fleet utilisation on its firm contract period on the assumption that all rigs operate without any downtime. Besides that, this year will see close to 80 jack-up rigs adding to the current oversupply, which will put further pressure on the existing DCR. Gearing level was higher at 1.52x in 1Q17 (vs 1.42x in 4Q16) while short-term debt comprised 41% of total borrowings.

Maintain HOLD With Unchanged TP of RM0.63

We are keeping our earnings forecasts unchanged at this juncture. We maintain our HOLD call with an unchanged 12-month TP of RM0.63 based on 0.5x 2017E P/BV. Upside risks to our call include a sharp rebound in oil prices leading to a recovery in drilling activities and stronger-than-expected demand for jack-up rigs. Downside risks include delays in exploration activities by oil majors.

Source: Affin Hwang Research - 23 May 2017