UMW Holdings - Takes delivery of group’s 3rd jack-up rig BUY

- We re-affirm our Buy call on UMW with an unchanged fair value of RM13.20/share. UMW took delivery of its new jack-up rig, i.e. the “Naga 4”, over the weekend. To recap, the rig was under construction at Keppel Fells’ yard in Singapore when UMW acquired it from Norwaybased SD Standard Drilling PLC (a former partner in jack-up rig ownership and operations) for USD214mil (RM683mil) back in June 2012.

- Naga 4 is the 3^rd  jack-up rig in UMW’s fleet. Naga 2 is currently deployed in Indonesia for a foreign client, but via a back-to-back arrangement with a 3^rd  party, hence at lower margins. Naga 3 is deployed in local waters for Petronas Carigali (See Table 2). 

- Naga 4 is of higher specifications (entailing 400ft water depth operational capability) compared with existing jack-up rigs, the Naga 2 and Naga 3 (350ft water depth operational capability). The cost of Naga 4 is 13%-19% higher than the USD180-190mil for Naga 2 and 3.

- Naga 3 incurred operational losses of circa RM5mil a month when it was in warm lay-up back in 2010 – both Naga 2 and 3 saw delays in the award of contracts, post UMW taking delivery of the rigs. 

- Our check with management this morning suggests that Naga 4 already has staff on-board to manage the rig, but costs are expected to be minimal. More importantly, we were made to understand that UMW is very close to signing a contract.

- We understand from past meetings that UMW has been months into negotiating a contract for Naga 4 when it decided to go ahead with the acquisition, and that talks involved both local and foreign parties. Our projections factor in a conservative USD145k/day rate for Naga 4, similar to rates for Naga 3. Any higher-than-expected rates secured will entice us to raise our numbers.

- The recent sell-down in the stock emanating from “election fears” provides a good entry opportunity. More importantly, the balance sheet at a 23% net gearing (post Naga 4 acquisition) is still pretty underleveraged – we see room for further rig fleet expansion. The listing of its O&G unit meanwhile should crystallise the value of UMW O&G – implied valuation of 11x FY13F earnings at current market cap vs. O&G sector PE of 16x and O&G asset owner-operator valuation of 19x-20x, e.g. Bumi Armada.

Source: AmeSecurities