UMW-OG’s results beat expectations on high investment income

by **Cals** Wed 26 Feb 2014, 17:35

Business & Markets 2014

Written by Affin Research

Wednesday, 26 February 2014 10:05

UMW Oil & Gas Corp Bhd
(Feb 25, RM4.29)
Maintain sell with a target price of RM3.12. UMW-OG’s core net profit for financial year 2013 ended Dec 31 (FY13) grew by 121% year-on-year (y-o-y) on higher profit contribution from its Naga 4 jack-up rig (which commenced operation in April 2013), Naga 1 semi-submersible rig (completed a deepdish conversion and major maintenance at end-2012) and higher interest income from its RM1.7 billion initial public offering (IPO) proceeds.

While the group’s FY13 revenue was flat at RM736.7 million (+1.7% y-o-y), its earnings before interest, tax, depreciation and amortisation (Ebitda) grew by a strong 51.4% y-o-y to RM280.3 million due to higher share of revenue from its own drilling rigs and lower reliance on the chartering of a third party semi-submersible rig (Hakuryu-5).

Overall, UMW-OG’s FY13 core net profit beat our expectation by 8%, but only due to a higher than expected investment income from its RM1.7 billion IPO proceeds. The group’s headline net profit was 4.6% above consensus’ full-year earnings forecast.

Sequentially, UMW-OG’s fourth quarter (4Q) core net profit was relatively flat at RM50.8 million (-0.6%) as higher net interest income of RM6.2 million (versus RM5.6 million net interest expenses in 3Q) was partly offset by lower operating profits.

UMW-OG reported lower 4Q Ebitda of RM74.3 million (-13.5% quarter-on-quarter [q-o-q]) due to lower utilisation rates of its hydraulic workover units (UMW GAIT I and UMW GAIT III) as well as lower earnings contribution from its oilfield services segment caused by machine downtime at its Labuan operation.

Notwithstanding the stronger than expected 4Q investment income, we make no changes to our FY14 and FY15 core earning assumptions — we project the group to utilise all of its IPO proceeds (with additional borrowings) in FY14 to fund its aggressive capital expenditure programme.

We have nevertheless tweaked our FY14 and FY15 earnings per share (EPS) forecast by +0.1 to +0.3% after updating the full-year financial statements.

In tandem, we have raised our target price to RM3.12 (from RM3.10) based on an unchanged 18 times calendar year 2015 (CY15) EPS. Maintain sell.

While we like the group’s management and the good prospects of Malaysia’s jack-up rig market, we opine that UMW-OG’s valuation is stretched with limited upside potential. Even with our strong earnings growth forecast of 73% compound annual growth rate over FY12 to FY15E, the valuation of 25 times CY15 price-earnings ratio is rich and in our view, the risk is to the downside.

Key risks to our negative view on UMW-OG is the undertaking of major earnings accretive mergers and acquisitions, faster than expected expansion plans and stronger than expected earnings. — Affin Research, Feb 25

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This article first appeared in The Edge Financial Daily, on February 26, 2014.