We believe that the immediate going concern risk for UMWOG is minimal if the proposed rights issue goes through and proceeds to be used to settle its debt obligation. However, uncertainties on how UMWOG will settle its other RM1.8bn debt obligation falling due in the coming years remain a concern (according to 2016 annual report disclosure). Based on our forecasts, the group’s cash flow would be insufficient to cover its next debt obligation and as such we believe the group may need another round of financing (likely to be debt this time). We revise down our 2017-18E loss forecasts by 19% and 15% and change our valuation methodology to DCF (from P/BV). With a new target price at RM0.35, we upgrade UMWOG to a HOLD in view of the steep decline in its share price of late. We believe the rights issue priced at RM0.30 will support its share price at current levels.

Headline Net Loss Sets New Low on Impairments

UMWOG reported 2Q17 revenue of RM139.9m (+88.4% qoq, +7.6% yoy) and a narrowed headline loss of RM51m (-51.0% qoq, -24.2% yoy). Stripping out the RM0.6m gain on PPE disposal and RM2.9m forex losses, cumulative 1H17 core net loss narrowed to RM152.8m (-2.8% yoy). This came in within our expectation but slightly above consensus, which accounted for 46% and 60% of full-year forecasts respectively. Average rig utilisation for 1H17 stood at 47%, a healthy increase from 29% in 1H16. EBITDA margin saw a positive increase of 10.4 ppts yoy to 19.3% for 1H17. Net gearing up slightly from 1.52x in 1Q17 to 1.55x in 2Q17.

QoQ Comparison

Sequentially, revenue leapt 88.4% to RM139.9m in 2Q17, driven by higher rig utilisations. 2Q17 saw a higher average rig utilisation rate of 68% as compared to 26% in 1Q17. EBITDA line turned from negative to positive. As a result, core net loss narrowed from RM103.3m to RM49.5m.

YoY Comparison

Amidst a higher daily charter rate (DCR) recorded in 2Q16, the higher rig utilisation rate of 68% recorded in 2Q17 drove revenue up by 7.6% against rig utilisation of 33% recorded in 2Q16. Core net loss narrowed 23.7% from RM64.8m to RM49.5m.

DCR Going Nowhere as Indicated by Latest Contract

Separately, UMWOG announced that its NAGA 5 jack-up rig has secured a 1-year contract with Repsol Oil and Gas Malaysia Limited, with an option to extend for another year. The contract is expected to commence sometime in mid-September 2017. Contract value announced was RM113m, which translates to DCR of approximately US$72,300/day.

Lowering FY17-18E Loss Forecasts by 19% and 15%

Our lower FY17-18E LPS estimates reflect the following changes in assumptions: (1) drilling rig utilisation of 70%, and (2) DCR of US$72- 75k. We also introduce our FY19E earnings at a loss of RM131m based on the assumptions of rig utilisation rate at 73% and average DCR of US$77k/day.

Switching to DCF Valuation, New TP at RM0.35

We are switching our valuation method from P/BV to DCF, as we believe P/BV may no longer be an appropriate valuation tool, affected by the significant impairment of its book value. Based on our DCF valuation (WACC assumption of 10.7% and terminal growth of 2%), we derive our new target price at RM0.35. We upgrade the stock to a HOLD (from SELL). We remain cautious on UMWOG for the following reasons: (1) demand for drilling rigs remains challenging, (2) based our assessment, UMWOG will likely need to raise another round of financing (likely to be debt) in 2019/20E due to shortage in cash to repay its next debt falling due, subsequent to partial debt repayment from the rights issue proceeds.

Key Risks

Key upside risks to our call include return in demand for jack up rigs which will lead to higher rig utilisation rate and DCR. Downside risks to our call would be lower-than-expected utilisation rate and DCR.

Source: Affin Hwang Research - 23 Aug 2017