KUALA LUMPUR (Jan 20): UMW Holdings Bhd (UMWH) is exiting the oil and gas sector following the proposed demerger of UMW Oil & Gas Corp Bhd (UMWOG), which is expected to be completed in the second quarter of 2017.

The group said it is exiting the oil and gas sector to refocus on its three core businesses, which are automotive, equipment and manufacturing and engineering.

The exercise will also be followed by a progressive exit from non-listed oil and gas assets held by UMWH.

In a note today, CIMB IB Research said the demerger will be positive for UMWH as it will remove losses and better reflect growth prospects in its automotive and manufacturing divisions.

CIMB projects earnings recovery for UMWH to start in the second half of 2017 and has upgraded its target price to RM5.10 (previously RM4.23).

Therefore it has stripped out 50% contribution from UMWOG in 2017 and 100% contribution from UMWOG in FY18 to reflect the timing of the deal completion

"The demerger will also be positive for UMWH's financial position as management projects to improve gearing ratio from 91% to 43%," the note said.

UMWH is also diversifying its exposure in the manufacturing division as it is projected to begin production of Rolls-Royce engine fan cases in fourth quarter of 2017 following a 25-year contract awarded in 2015.

Meanwhile UMWH also said it will undertake a bonus issue of RM1.2 billion of redeemable preference shares, issued at par value of 1 sen to its shareholders, of which its redemption would be satisfied in the form of UMWOG shares.

At the same time, UMWOG has proposed to acquire a 42.3% stake in Icon Offshore Bhd from Ekuiti Nasional Bhd for purchase consideration of RM248.9 million via share issuance of 311 million new shares at an issue price of 80 sen a share.

It has also proposed to acquire product tanker owner Orkim Sdn Bhd for a cash consideration of RM472.7 million, to be funded via a rights issue. The rights issue is expected to raise up to RM1.8 billion, which will be used for working capital and repayment of borrowings and bridging facility of the acquisition.

In a separate note by Hong Leong Investment bank, analyst Lim Sin Kiat opined that the deal will have a dilutive value on UMWOG as the businesses do not overlap significantly.

Hong Leong Investment bank has reduced its target price to 65 sen from 91 sen to account for a potential share price overhang upon anticipation of announcement of share distribution as well as the effect of limited synergistic benefits and a large dilution impact expected from the merger.