This article first appeared in The Edge Financial Daily on May 8, 2017

UMW Oil & Gas Corp Bhd
(May 5, 62 sen)
Upgrade to hold with a higher target price of 72 sen: UMW Oil & Gas Corp Bhd (UMW-OG) has terminated the agreement to acquire Icon Offshore Bhd and Orkim Sdn Bhd. It has instead proposed a 14-for-five rights issue for shares held by entitled shareholders with rights priced at 30 sen, in order to raise RM1.8 billion. The theoretical ex-price is fixed at 39.5 sen. The rights are also attached with free warrants (one warrant for every four rights) with exercise price fixed at 39.5 sen (based on theoretical ex-price).

Structure of the deal is dependent on two scenarios: If shareholders (other than Permodalan Nasional Bhd [PNB]) fully subscribe to the rights, PNB will only be subscribing to its entitled portion (45.5%); and if shareholders (other than PNB) do not subscribe to the rights, PNB would fund the rights without resulting in its shareholding exceeding 65% (post the exercise), while the remaining unsubscribed rights would be converted to RCPS-I (issue price of 30 sen per unit with  five-year tenure and 8% annual premium and non-compounded). The RCPS-I is also attached with warrants based on one-for-four.

Compared to previous deal of acquiring Icon Offshore and Orkim, we are positive about the new proposal as it removes the market overhang on the valuation and lack of synergy from the deal. The repayment of borrowings post this corporate exercise would result in about RM60 million interest-cost savings and reduce the gearing from 1.8 times to 0.49 times on full basis regardless of the scenarios. In addition, the repayment of loans post rights issue would release US$125 million (RM541.25 million) worth of cash pledged for its existing loans. This would in turn be utilised to repay its shareholders’ loans. The exercise would lower the group’s short-term liquidity risk. The proposed new deal removes share-price overhang of acquisition of Icon Offshore and Orkim. However, outlook for the overall rig market remains weak.

We upgrade the stock to “hold” from “sell” with TP raised to 72 sen from 57 sen previously based on higher price to book value multiple of 0.8 times from 0.7 times. — HLIB Research, May 5