We value UMW-OG at RM3.33/share, based on CY14 21.0x PER. This is at a small discount to the PER of 22.0x which we ascribed to Sapurakencana (SKPETRO; OP; TP: RM4.72), in terms of relatively smaller size than the latter. Whilst this is at a premium to its global peers’ weighted average CY14 PER of 7.7x, we believe UMW-OG should be rated against domestic peers given that the major contributor to group earnings is mainly derived from Malaysia. UMW-OG offers two earning streams: (i) drilling services and (ii) oilfield services. The drilling division accounts for more than 90% of group’s earnings, which consists of (i) semi-submersible drilling rig - NAGA 1; (ii) premium jack-up drilling rig - NAGA2, NAGA3 and NAGA4; and (iii) Hydraulic Workover Units (HWUs) – UP GAIP I, UP GAIP II, UP GAIP III and UP GAIP V. With several drilling contracts expiring from mid 2013-2015, this presents a huge opportunity for UMW-OG to further expand its drilling services division.

UMW Oil and Gas Corporation Bhd (UMW-OG) is the first Malaysian owner and operator of three premium jack-up drilling rig and is also the sole Malaysian owner and operator of HWUs and a PETRONAS-licensed provider of HWU services. Its proven track records of consistent execution and staffed by high-skilled engineers and drillers will ensure positive contract flows going forward.

Young premium jack-up drilling rig (average age of 3 years) coupled with further expansion of the asset base enables UMW-OG to operate across boundaries and capitalise on the increasing demand as several contracts are up for expiry in Malaysia and other South East Asian countries from mid 2013-2015. In May 2013, UMW-OG acquired a mobile offshore self-elevating jack-up drilling rig (B340) which costs USD223.0m which is expected to be completed and delivered in May 2014. The new rig is expected to contribute a net profit of RM30m-RM55m p.a.

Experienced leadership team and strong relationship with Petronas. The group is led by an experienced Board with strong relationship to Petronas. The group’s dedicated management team has been successful in formulating and implementing its strategic plans in the past few years and also in building a sound operational track record. We believe that the experienced and skilled workforce is the company critical competitive advantage as it helps the company to maintain operating efficiency.

Expecting a strong revenue in FY13 and FY14. We expect the group to achieve RM211.2m (+>100.0% YoY) and RM343.2m (+62.5% YoY) of net profits in FY13 and FY14, respectively. Its FY13 and FY14 turnovers meanwhile are expected to be RM827.7m (+14.3% YoY) and RM1,183.4m (+43.0% YoY), respectively. Drivers for the significant growth in net profit are: (i) better utilization of its existing assets; (ii) increased asset base (we expect the company to buy 3 more jack-up rigs), (iii) higher daily charter rates for renewed and new contracts (USD160k-USD170k versus current USD130k-USD150k), and (iv) better cost efficiency, which will bring about better EBIT margins. Risks to the stock are: (i) downturn in the oil & gas sector; and (ii) drilling services contracts may be terminated prematurely. 

Source: Kenanga