We are upgrading UMWOG to a BUY with an unchanged DCF-derived TP of RM0.35. This is the first quarter that the group has reported a profit since 4Q15. However, it is unclear at this juncture if the current quarter performance can be sustained as EBITDA margin came in at 55%, which is higher than the margins during the good old days of 40%. We make no changes to our earnings pending Monday afternoon’s analyst briefing.

First Positive Sign Since 4Q15

UMWOG’s 3Q17 earnings saw a turnaround after significant losses over the past two years. Headline net profit came in at RM3.4m (+107% qoq, +103% yoy), a sharp improvement over the previous quarter’s losses. Nevertheless, 9M17 earnings remained in the red at RM147m, which accounted for 81% of our and 68% of consensus forecasts. 9M17 revenue surged 48% yoy to RM394.7m driven by a higher rig utilisation rate of 61% vs. 22% in 9M16.

Stronger QoQ

3Q17 recorded a headline profit of RM3.4m. After stripping off the one-offs, core net profit stood at RM5.8m (+112% qoq, +104% yoy) driven by the revenue growth of 48% qoq as average utilisation rate recovered to 90% vs. 68% in 2Q17. This also led to the jump in EBITDA margin from 31% to 55%. We believe that the RM7.6m ‘other operating income’ in this quarter is non-reccurent and may have provided the exceptional boost in margin and earnings.

Upgrade to BUY

We upgrade the stock to a BUY with an unchanged DCF-derived TP of RM0.35. Key downside risks to our BUY call would be lower-than-expected utilisation rate and daily charter rate.

Source: Affin Hwang Research - 27 Nov 2017