We left UMWOG’s analysts’ briefing feeling neutral on the Group’s prospects. Utilisation rate for its rigs is expected to increase on the back of contracts secured in the past few months. However, average DCR is expected to fall due to an oversupply in rigs. Furthermore, the merger with Icon and Orkim, coupled with subsequent rights issue, may provide some relief to UMWOG’s cashflow. However, given pricey valuations for the merger, and minimal synergies, the merger would be a drag on UMWOG’s share price. We maintain our earnings forecast and TP of RM0.54 based on 0.6x CY17 P/B. Maintain Sell.

Key takeaways from the analysts’ briefing are as below:

• The RM780.2mn of impairments was mainly carried out on the drilling rigs and HWUs. Management believes if the market improves, impairments will be written back.

• The large amount of impairments would likely reduce depreciation costs going forward. We have estimated a ~10% reduction in deprecation for FY17 compared to FY16.

• Fleet utilisation in 4QFY16 was 20% whilst the average for FY16 was 21%. (Jan 2015: 85%). Management expects fleet utilisation to inch higher to 50% in April (YTD: 25%). This is mainly driven by NAGA 2 and 7, which will commence operations in Ophir field and Sabah.

• Total contract wins amount to RM833mn, underpinned by charters for NAGA 2, 6, 7 and 8. Meanwhile, outstanding orderbook stands at RM639mn. Recall that NAGA 6, 7, and 8 are longer term contracts of 1.5-2 years whereas NAGA 2 is on a 75 day contract with 1-month extension option.

• Average DCR for FY16 was USD87K (FY15: USD128K) which was likely driven by NAGA 1. Note that NAGA 1 was chartered out during the first 3 quarters of FY16. Management believes FY17 DCR will average at circa USD70K, which is slightly below our expectations of USD83K.

• Going forward, management believes it can secure 2-3 more contracts. It is currently bidding for 17 international contracts and 11 Malaysian contracts worth USD758mn. We are more bullish on the local contracts given Petronas’ affinity for local players.

• Furthermore, the Group has seen an increase in global demand for jack-up rigs to 302 rigs (FY16: 291 rigs). Additionally, a large amount of jack-up rigs may have retired as the risk certification cost is higher for older rigs. Management estimates that there are 271 jack-up rigs that are aged 30 years and above.

• Regarding the merger, UMWOG’s cash flow difficulties will be alleviated by Icon and Orkim. Furthermore, after the rights issue, the merged entity’s net gearing will reduce to 0.91x (current: 1.69x). However, we believe synergies between both businesses are minimal.

Impact

• We make no changes to our earnings forecasts.

Valuation

• We believe UMWOG will continue to face a challenging operating environment. Although initial signs of recovery are emerging, we expect full recovery to be slow and protracted. Furthermore, UMWOG’s consolidation exercise has minimal synergies, despite pricey valuations. We maintain our TP of RM0.54 based on 0.6x P/B and maintain SELL.

Source: TA Research - 1 Mar 2017