Maintain Trading BUY and MYR1.16 TP

1Q16 results fell short, on widening QoQ core net losses. This prompted a 69-104% rise to our net loss forecasts for FY16-18. Despite the setback, downside is limited for the tough operating and financial outlook over the next 12 months has been reflected in the share price’s performance (-56% since a year ago). We reiterate our contrarian Trading BUY call with an unchanged MYR1.16 TP, based on 1x EV/replacement value.

1Q16: In the red, 3rd quarterly loss in a row

UMWOG’s core net loss jumped 6.6x QoQ (1Q15 was a core net profit of MYR34m) to -MYR93m in 1Q16; 68% of our initial full year forecast. The higher QoQ net loss was largely due to the weaker-than-expected rigs utilisation (-25-ppt to 25%). Of the 8 rigs, only 2 units (Naga 7 & 8) were working in 1Q16 (vs. an expected 3). Whilst Naga 4 was contractually on firm charter up to Mar 2016, it was warm-stacked in 1Q16, with zero utilisation due to the deferment of the client’s drilling programs by 3 months to 2Q16. Despite the contractual commitment, we understand that rigs are now remunerated based on ‘pay-per-use’ basis, which reflects the adverse drilling conditions worldwide.

Cut forecasts, on lower utilisation and DCRs

We raised FY16/17/18 core net loss estimates by 104%/69%/92% to reflect lower: (i) rigs utilization at 43% (-11-ppt) in 2016, and 63% (unchanged) in 2017 and 2018 and (ii) DCRs at USD75k (-21%; market rates: USD70k-80k) for 2016-18 respectively. UMWOG currently tenders for 22 projects (USD628m), of which majority are for 2017’s workflow. It needs to secure 5 new jobs to return to the black, we estimate.

Challenging 2016, expecting an improved 2017

UMWOG’s immediate priority is to improve the fleet’s utilisation and rationalise costs. It has cut 300 jobs (29% of workforce) and reduced senior management’s remuneration by 40%. Despite that, most of the adverse outlook has been priced in. Our contrarian Trading BUY call is based on valuations and timing, ahead of a cyclical recovery.

Source: Maybank Research - 24 May 2016