Target RM5.00 (Stock Rating: ADD)
At our recent meeting with UMW-OG's management, we were pleasantly surprised by the early delivery of Naga 5 next month, instead of in May. The jack-up will be deployed to service a 6-month contract in the Philippines in May, a month earlier than expected. We are thrilled that management is already in talks with some companies to secure a second contract for Naga 5. In the months ahead, we expect active newsflow as UMW-OG clinches its first contracts for Naga 6, Naga 7 and Naga 8. We continue to value the stock at 22.5x CY15 P/E, a 40% premium over our target market P/E, but still within the historical P/E range of the oil & gas big caps. We maintain our contrarian Add call, with the aggressive fleet expansion as a potential re-rating catalyst.
At our recent meeting with UMW-OG's management, we were pleasantly surprised by the early delivery of Naga 5 next month, instead of in May. The jack-up will be deployed to service a 6-month contract in the Philippines in May, a month earlier than expected. We are thrilled that management is already in talks with some companies to secure a second contract for Naga 5. In the months ahead, we expect active newsflow as UMW-OG clinches its first contracts for Naga 6, Naga 7 and Naga 8. We continue to value the stock at 22.5x CY15 P/E, a 40% premium over our target market P/E, but still within the historical P/E range of the oil & gas big caps. We maintain our contrarian Add call, with the aggressive fleet expansion as a potential re-rating catalyst.
What Happened
Earlier this week, we met with management of UMW-OG, who confirmed that Naga 5, a US$223m (RM738m) jack-up that is under construction at Keppel's (KEP SP, Add) yard in Singapore, will be delivered next month, a month earlier than expected. The jack-up already has a contract waiting for it. In Dec 2013, UMW-OG bagged a 6-week US$7m (RM23m) drilling contract from Australia's Nido Petroleum for work at the Baragatan prospect in the Philippines. The contract value translates to an attractive daily charter rate of approximately US$165,000 per day due to the short work period. Management also assured us that Naga 6 and Naga 7 are slated for delivery in Sep and Dec 2014 respectively, while Naga 8 is set to join the fleet in Sep 2015.
What We Think
We are encouraged that UMW-OG's fleet expansion programme is progressing as planned. With the early delivery of Naga 5, the contract with Nido is likely to start by mid-May, instead of Jun as earlier expected, for completion by end-Jun. We understand that management is negotiating with some companies to secure a second contract for Naga 5, with the outcome due as early as next month. We expect the daily charter rate to normalise to around US$150,000, which is still appealing, if the jack-up is put on a long-term charter.
What You Should Do
Accumulate the stock as UMW-OG embarks on an aggressive fleet expansion to take advantage of the shortage of Malaysian-flagged jack-ups as well as the high demand for this asset class in Southeast Asia.
Earlier this week, we met with management of UMW-OG, who confirmed that Naga 5, a US$223m (RM738m) jack-up that is under construction at Keppel's (KEP SP, Add) yard in Singapore, will be delivered next month, a month earlier than expected. The jack-up already has a contract waiting for it. In Dec 2013, UMW-OG bagged a 6-week US$7m (RM23m) drilling contract from Australia's Nido Petroleum for work at the Baragatan prospect in the Philippines. The contract value translates to an attractive daily charter rate of approximately US$165,000 per day due to the short work period. Management also assured us that Naga 6 and Naga 7 are slated for delivery in Sep and Dec 2014 respectively, while Naga 8 is set to join the fleet in Sep 2015.
What We Think
We are encouraged that UMW-OG's fleet expansion programme is progressing as planned. With the early delivery of Naga 5, the contract with Nido is likely to start by mid-May, instead of Jun as earlier expected, for completion by end-Jun. We understand that management is negotiating with some companies to secure a second contract for Naga 5, with the outcome due as early as next month. We expect the daily charter rate to normalise to around US$150,000, which is still appealing, if the jack-up is put on a long-term charter.
What You Should Do
Accumulate the stock as UMW-OG embarks on an aggressive fleet expansion to take advantage of the shortage of Malaysian-flagged jack-ups as well as the high demand for this asset class in Southeast Asia.
Source: CIMB Research, Full PDF Report
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