UMW Oil & Gas Corp : Still massive dilution for balance sheet health HOLD

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UMW Oil & Gas Corp : Still massive dilution for balance sheet health        HOLD

We downgrade our call on UMW Oil and Gas Corp (UMWOG) to HOLD from BUY a lower fair value of RM0.62/share (from an earlier RM0.80/share), based on a 40% discount to book value vs. an earlier 20% discount on the book value of the group's rigs.

As we had highlighted on 26 April, the proposed merger between UMWOG, Icon Offshore and Orkim has been aborted, which we are positive due to their unjustified valuations at PBVs of 1x and 3.6x respectively vs. UMWOG's 0.8x. However, the group is still undertaking a massive recapitalisation at 1.2x its current market capitalisation by undertaking a RM1.8bil renounceable rights issue, now priced at RM0.30/rights shares on a basis of 14-to-5 existing shares, bundled with a free 1-for-4 7-year warrant which is exercisable at RM0.395.

Recall that UMWOG has proposed a RM1.8bil renounceable rights issue at a higher RM0.50/share with a free detachable 7-year warrant together with the acquisition of Icon Offshore for RM589mil and Orkim for RM495mil in January this year. To ensure that UMWOG will secure the entire funds of RM1.8bil, PNB will also subscribe to up to 4.8mil new Islamic redeemable convertible 5-year preference shares (IRCPS) at RM0.30/IRCPS together with the 1-for-4 free 7-year warrant. Targeted for completion in 3QFY17, we concur with UMWOG’s need to significantly improve its balance sheet health, including additional debt refinancing for the RM308mil shareholder loan by UMW Holdings. However, this massive rights issue will halve the group’s net assets from RM1.04/share currently to RM0.50/share, excluding warrant dilution. Together with the massive rights dilution, we now view the 34% discount to book value as justified.

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Tan Chong Motor : Running out of air                                                     HOLD

IJM Plantations : FY18F FFB growth intact                                              HOLD

MISC : Headwinds yet to subside                                                              HOLD

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