UMW’s long overdue plan to list O&G unit may excite local bourse

  • Business
  • Saturday, 15 May 2010

IN today’s volatile markets, timing is everything. It can be the difference between success and failure.

So, when UMW Holdings Bhd held back its plan to list its oil and gas (O&G) unit – not once, but thrice – over the last two years, it may have just made the right decision.

To recap, the diversified industrial group first made known its intention to list its O&G businesses under the name of UMW Oil & Gas Bhd in February 2008. Months later, signs began to emerge that market conditions would turn unfavourable due to the weakening global economy. And when the world finally entered into recession towards the end of that year, it then seemed almost impossible for any company to command reasonably good prices for their shares.

But now with the global economy recovering and market conditions improving steadily, particularly for the oil and gas sector, UMW Holdings’ plan to revive the proposed initial public offering of the O&G unit could just be timely.

The company’s president and group CEO, Datuk Abdul Halim Harun, over the week told the press that the listing of the group’s O&G business would most likely take place by the end of the year. However, he also said the materialisation of such a plan would still depend on several factors, including the global economic condition, which would ultimately affect global crude oil prices, and the success of its investments in India.

As of now, most economists reckon that the risk of a double-dip recession is still pretty remote, despite the ongoing euro debt crisis, and that the global economic recovery will be sustained towards the end of this year and the next. This implies that global crude oil prices will remain steady too.

Based on the US Energy Information Administration’s forecast released last week, crude oil prices are expected to average at US$80.06 per barrel this year, and US$85.50 per barrel in 2011. That’s a significant recovery, considering global crude oil prices were in the range of US$35 to US$40 per barrel between late 2008 and early last year after falling from its historical high of US$147 per barrel in July 2008.

According to industry observers, as long as global crude oil prices stay above the US$70 per barrel level, there will be an active flow of projects in the O&G sector. And in such instances, UMW Holdings’ O&G division would be one of the beneficiaries.

UMW Holdings’ O&G business activities include the manufacturing of oil country tubular goods (OCTG) and line pipes, exploration operations, fabrications, provision of oilfield services and supply of oilfield products. Its O&G operations are currently based in 12 countries, including Australia, China, India, Indonesia, Singapore, Thailand and Vietnam, and it has set its sights on further expanding into the Middle East.

Holistic structure

“Based on what we’ve gathered so far, from the macro perspective, it should not be a problem for UMW Holdings to list its O&G unit by the end of the year,” explains an analyst from a local research outfit.

The listing of the O&G division is seen as a positive move for UMW Holdings, which currently generates most of its funds from its auto division. With the group’s O&G division gaining direct access to the capital market to raise funds for its expansion and future growth, fund drainage at group level resulting from investments in the O&G sector would be reduced significantly, AmResearch notes in its report.

O&G currently accounts for 20% of the group’s business, but the management foresees the division’s contribution to increase to 35% by the end of this year.

UMW Oil & Gas’ original listing proposal to raise more than RM400mil involved a public issue of 250 million shares at 50 sen each, and the company was seen to bear a market value of RM1.5bil. But the listing this time around is expected to be bigger.

A foreign fund manager is optimistic that by the end of the year, UMW Holdings would sort out the structure of its O&G business.

“We believe that most of the group’s O&G subsidiaries would be ready for injection into the O&G holding company by then, and it will be a more holistic set of business, with most of the subsidiaries realising their potential earnings,” she says.

Many market analysts are bullish about UMW Holdings’ O&G prospects, due to the group’s projects in China and India, which they believe could generate significant income flow in the months ahead. Among its business in these fast-growing economies are an OCTG plant in India, and a pipe manufacturing plant in Qinhuangdao, China.

Given its vast business potential, some analysts believe UMW Oil & Gas would be one of the more favoured counter when it is listed on Bursa Malaysia.

Analysts believe the listing of UMW Holdings’ O&G division is in line with the call by the Government for more high-quality investable companies to be listed on Bursa Malaysia to add vibrancy to the local stock market.

However, a foreign fund manager says the counter’s attractiveness will depend on its market capitalisation.

“And if there is sufficient free float, it won’t be surprising that the counter could turn out to be one of the most sought-after on Bursa Malaysia,” he says.

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