This article first appeared in The Edge Financial Daily on March 14, 2018 - March 20, 2018

UMW Oil & Gas Corp Bhd
(March 13, 30.5 sen)
Maintain buy with an unchanged target price of 44 sen: UMW Oil & Gas Corp Bhd (UMW-OG) has announced that it had been awarded a contract for the provision of 460k drilling hydraulic workover unit (HWU) for Petronas Carigali Sdn Bhd.

The tenure of the contract is three years commencing from Feb 6, 2018, with an extension option of one year. While we are positive about the contract announcement, the positive earnings impact from the contracts has been included within our forecasts. On top of that, we believe the margin for the contracts would not be far off from our existing assumed earnings before interest and tax margin of 6% as Petroliam Nasional Bhd (Petronas) would still be cost-conscious in terms of quotation of its work orders (due to uncertainties in oil prices despite firmer trend).

The announcement of the contracts indicates a pickup in oilfield maintenance activities, pointing to improvement in activities in the overall upstream industry. We maintain forecasts as the utilisation of HWU is within our order-book-replenishment assumption.

Following the latest outstanding quarterly results, we opine that earnings outlook of UMW-OG has improved significantly and the company is a major beneficiary of steady jack-up rig demand by Petronas Group given its role as the largest domestic jack-up rig owner. Moreover, recent share-price correction has made the valuation of the stock more attractive. We maintain our “buy” call with an unchanged TP of 44 sen (pegged at unchanged financial year 2018 book value per share of 0.8 times). — Hong Leong Investment Bank Research, March 13