AmInvestment upgrades UMW-OG to ‘buy’, raises target price to 80 sen

UMW Oil and Gas Naga 1 rig

KUALA LUMPUR: AmInvestment Bank Research has upgraded UMW Oil and Gas Corp (UMW-OG) to “buy” from “hold” with a higher fair value of 80 sen, based on book value at a 20% discount on the cost of the group’s rigs. 

The research house said its valuation had now excluded the 30% reduction to the acquisition costs of Icon Offshore and Orkim.

Starbiz reported today that the proposed merger between UMW-OG, Icon Offshore and Orkim is on hold as major shareholders Permodalan Nasional Bhd (PNB) and  Ekuiti Nasional Bhd (Ekuinas) are uncertain of the deal being able to secure minority shareholders’ approval.

Currently, PNB has a 64% effective stake (including Skim Amanah Saham Bumiputera’s 8.4%) in UMW-OG while the Employees Provident Fund (EPF)’s stake in UMW-OG has fallen below 5% since late last year. 

A merger would need to cross the 75% shareholder approval threshold.

“In our update yesterday, we highlighted that UMW-OG had extended the deadline to conduct due diligence on the other two companies to May 19 this year. Also, the cut-off date to fulfil, waive or complete the conditions precedent for the merger will be extended by additional three months to July 19 this year,” AmInvestment said. 

The research house maintained that the abortion of these acquisitions would be value-enhancing for UMW-OG. 

“In our view, the proposed acquisitions (together with the demerger from UMW Holdings) of Icon Offshore and Orkim are at unjustified PBVs of 1x and 3.6x respectively vs. UMW-OG’s 0.8x, leading to value erosion for the group against the backdrop of an offshore sector still struggling with operating losses,” AmInvestment said. 

The research house estimated that the merged entity’s much needed RM1.8bil recapitalisation plan could have been cut by 60% to RM0.7bil, resulting in a lower dilution of 7% to minority shareholders. 

As such, it said UMW-OG’s book value of RM1.04 per share would only drop to 97 sen per share against 92 sen per share previously.

“With the now likely abortion of the merger with Icon Offshore and Orkim, the stock currently trades at an unjustified 38% discount to its latest book value of RM1.04 per share,” it added.