UMW Holdings - Enter Another Dragon

UMW announced that it is acquiring its fourth Jack Up Rig with a water depth and drilling depth of 400ft and 30,000ft respectively, which we anticipate would be contracted by either Petronas or HESS to drill oil within the ASEAN region. This is deemed positive and compels us to bump up FY13/FY14 forecast earnings by 2.2%/3.3%. As such, we upgrade our FV from RM9.55 to RM10.46. We like UMW for its auto exposure in view of the resilient demand for passenger vehicles as new model line-ups continue to spur market interest, coupled with the turnaround in the oil and gas segment (which we expect to be profitable this year). We have a high conviction BUY on this counter which remains our top auto sector pick.

The fourth Naga. UMW yesterday announced that it is acquiring its fourth Jack Up Rig with a water depth and drilling depth of 400ft and 30,000ft respectively. The rig which is currently constructed by Keppel Corp will be purchased from Standard Drilling PLC for a total consideration sum of USD214m (RM683m). The rig will be completed and delivered by Feb 2013. Furthermore, UMW was also granted the option to purchase another rig priced at USD212m. The option shall be exercised by UMW D4 by 27 Sept 2012. However, UMW has not made any decision on whether to exercise this option at this point in time.

Rig bought at a fair price. The Naga 4 Jack Up Rig is an Independent Leg Cantilever B Class Jack Up Rig designed by Keppel FELS Ltd at its Singapore shipyard. The KFELS B-Class Jack Up Rig is a first class rig design and also the major drilling companies’ preferred design. It is a highly adaptable rig that can be used for deployment in harsher environments. We understand that Keppel FELS has a track record of delivering KFELS B-Class Rigs on time or ahead of schedule. With the UMW purchase amounting to USD214m, we note that the estimated net profit booked by Standard Drilling PLC works out to USD8.5m per rig, which represents a decent profit margin.

Upping earnings on Naga 4 contribution. Assuming a net profit margin of 15%, a charter rate of USD136k/day (which is at a slight discount to the spot rate of USD150k/day) and after incorporating deployment costs, the upsides to our FY13 and FY14 earnings forecasts are an additional RM22.5m and RM37.4m respectively, thus bumping up our FY13/FY14 earnings forecasts by 2.2%/3.3% relative to our previous estimates. We have not imputed the option to purchase an additional rig into our estimates for now, though we reckon UMW is likely to exercise this option as the rig provides a mid-teen IRR.

Upgrade Fair Value, Maintain BUY. We upgrade our FV on UMW from RM9.55 to RM10.46 on the back of the higher FY13 earnings. We maintain our BUY call. We like UMW for its auto exposure in view of the resilient demand for passenger vehicles as new model line-ups continue to spur market interest, as well as the turnaround story for its oil and gas (O&G) business. The O&G segment is expected to be profitable this year, with profits almost doubling by FY13. Furthermore, at the current share price, UMW still offers a decent dividend yield of 4.3%, which could give a net or total potential share price upside of 21%.

Source: OSK