UMW Oil & Gas Corp Bhd
(May 15, RM2.06)
Maintain fully valued with unchanged target price (TP) of RM1.75: UMW-OG’s core earnings for the first quarter ended March (1QFY15), excluding RM7.4 million investment income, were disappointingly below our or consensus estimates, coming in at only 10% of full year estimates. 

We were bracing for weak earnings but the initial delivery costs of the idle drilling unit NAGA 7 ate into group profit more significantly than expected.

Overall lower margins were also due to lower charter rates, giving in to pressure from customers amid weak crude oil prices.

We look to further cut our estimates in a follow-up report. Considering that in 2Q, the NAGA 2 and NAGA 3 rigs will be on maintenance (for one month), while the NAGA 7 continues to be idle means that earnings could be even lower quarter-on-quarter.

Looking into FY16, we think it may be a challenge for UMW-OG to achieve our current forecast as the sluggish jack-up drilling market may be prolonged even after crude oil prices recover due to ample supply.

New jack-up rig deliveries are diluting charter rates and causing warm and cold stacking activity among global rig players.

Clarkson Research Services Ltd’s data indicates 61 and 45 new jack-up (more than 90m of water depth) deliveries scheduled over 2015/16.

The impact of this is spilling into UMW-OG, as the company is seeing lower tendering activity, especially in recent months.

We are retaining our RM1.75 TP (16 times FY15 price-earnings ratio) for UMW-OG for now, pending a review of our earnings, and rate the stock as “fully valued”. — AllianceDBS Research, May 15

This article first appeared in The Edge Financial Daily, on May 18, 2015.