UMW Holdings - Rig fleet expansion underpinned

- We re-affirm our BUY rating on UMW, with an unchanged fair value of RM10.00/share – following the announcement of rig acquisitions last night. Upward earnings revisions in this report affect FY13-14F projections and as such, do  not impact our FY12F-based valuation for the meantime.

- UMW has entered into a share purchase agreement to buy SD Standard Drilling Plc’s (Standard Drilling) entire stake in Offshore Driller B324 Ltd (Offshore) for USD70mil (to be completed by 12 July 2012). With the purchase, UMW will own Offshore’s rights to buy a mobile offshore drilling rig (a jack-up rig) for USD144mil, which brings the total acquisition cost to USD214mil (RM683mil). 

- The rig is under construction at Keppel FELS’ yard  in Singapore and is due for delivery in February 2013. The new rig is of higher specs (entailing 400ft drilling depth capability) compared with UMW’s existing jack-up rigs, the Naga 2 and Naga 3 (350ft drilling depth capability). The cost of the new rig is 13%-19% higher than the USD180-190mil for Naga 2 and 3.

- We understand that UMW has been sniffing around for a contract for quite some time and that acquiring ownership of the rig should help expedite and deepen negotiations. We gather that UMW is talking to a few parties, including Petronas Carigali. Deployment of the rig is not limited to just marginal fields. 

- The acquisition cost of RM683mil is likely to be funded largely by debt given UMW’s underutilised balance sheet. This should increase net gearing to circa 23% (FY12F, assuming 90% debt) which still leaves room for UMW  to leverage up (equity base: RM5.9bil) for more acquisitions down the road. More importantly, the purchase comes with an option to acquire another jack-up rig owned by Standard Drilling for USD212mil (exercisable till 27 Sep 2012. We understand that this rig entails similar specs as the first rig.

- We raise FY13F-14F earnings by 2%-3% to reflect potential earnings from the first rig, but exclude contribution from the second rig for the meantime. We conservatively assume similar rates as Naga 3 at circa USD145K/day. In reality, the new rig may command higher rates given its higher specs. 

- The announcement underpins one of the key premises of our BUY call on UMW – M&As in the O&G and auto sector given an underutilised balance sheet. Via the acquisition, UMW is fast becoming a key proxy to local oil & gas development, particularly as one of the largest local rig operators. This bodes well for upcoming job prospects given UMW’s increasing track record and growing rig fleet. Newsflows on the award of 6 marginal field clusters in 2H12 should act as further re-rating catalysts for UMW’s O&G division.

Source: AmeSecurities