• UMW exiting the O&G industry via re-distribution of UMWOG shares to shareholders

• Removes a key drag on balance sheet and bottomline can possibly swing into profits

• Improvement in risk profile might pave the way for more value creation

• Meantime, this positive new is likely to drive a fresh round of valuation re-rating. We raise UMW to a TRADING BUY at unchanged TP of RM5.15/share

Exiting the O&G industry. UMW Holdings (UMW) announced that it will redistribute (hence dispose) its entire 56% stake in UMW Oil & Gas (UMWOG) to UMW’s shareholders. This will be done via dividend-inspecie at date to be determined later. Post-exercise, UMW’s shareholders will own shares directly in UMWOG.

The exercise is part of UMW’s plan to exit the O&G industry. The remaining unlisted O&G businesses currently sitting at UMW (comprising mainly pipe manufacturing, land rigs and trading) will be gradually disposed off. PNB and EPF will end up with 45% and 14% direct stakes in UMWOG from 13% and 5% currently.

UMWOG to undertake industry consolidation. After the demerger from UMW, UMWOG will undertake a merger exercise with Ekuinascontrolled Icon Offshore and Orkim Sdn. Bhd. The plan is to acquire 100% in Icon by issuing new shares in UMWOG (valued at RM0.80/share, a 10% discount to current market price) to the respective sellers. Icon shares in turn are valued at RM0.50/share (a 15% premium to current market price). As for Orkim, UMWOG will pay RM475m cash for Ekuinas’ 96% stake in the company.

Post-consolidation, the enlarged UMWOG group will undertake a rights issue to raise RM1.8b mainly to repay debt, of which part of it will be used for the acquisitions. The demerger from UMW is expected to be completed by April 2017, while the consolidation and rights issue are expected to be completed in July and August respectively.

Source: MIDF Research - 20 Jan 2017