FY17 core net losses narrowed 66% yoy as rig utilisation rate showed further improvement. We believe the worst is over for UMWOG post restructuring exercise (with net gearing reduced to <0.5x) and 4Q kitchen sinking exercise (reducing the depreciation impact). Based on current contracts in hand, we believe 1H18 will continue to see a healthy rig utilisation. We maintain our BUY call with higher target price of RM0.40.

First Profitable Quarter; 3Q Boosted by One-off Warranty Claim

Notwithstanding 3Q which reported a headline profit of RM3.4m, artificially boosted by a RM7m warranty claim, UMWOG reported its first real recovery in 4Q17, since 2Q15, as core net profit came in at RM8.7m. This brought full-year 2017 core net losses to RM145.3m, which has narrowed 66% yoy. The results was a positive surprise to both our and consensus forecasts. Revenue soared by 83% yoy as rig utilisation rate improved from an average 21% in 2016 to 70% in 2017. EBITDA margin also jumped by 52ppts in tandem with the improving utilisation rate.

Further Sequential Improvement

The better rig utilisation rate in 4Q17 has resulted in a better revenue at RM191.8m, up 6.2% qoq. 4Q17 saw all 7 drilling rigs in operation (with 5 showing a full quarter contribution) vs. 90% rig utilisation in 3Q17. EBITDA margin fell 2.1ppts to 49.4% (vs. good old days 40% margins). Core earnings showed a commendable recovery, which swung from a small RM1.2m loss in 3Q (after deducting the one-off warranty claim and forex loss) to RM8.7m profit in 4Q17.

Tweaking Our Earnings Post Restructuring

We narrow our FY18-19E loss assumption as we incorporate a lower finance cost following the restructured balance sheet and also a better margins moving forward. Our check indicate that 1H will continue to see a healthy rig utilisation of 80–85%, but potentially decline in 2H if no new contracts are being secured. We assumed an average rig utilisation of 71% in FY18 and 73%/81% in FY19-20E.

Maintain BUY

We maintain our BUY call with higher DCF target price of RM0.40 (from RM0.35). Key downside risks to our BUY call would be lower-thanexpected utilisation rate and daily charter rate.

Source: Affin Hwang Research - 28 Feb 2018