UMW Oil & Gas ‘sell’, Pestech 'outperform',utilities 'overweight'


The Naga 1 rig. UMW O&G just took delivery of its Naga 8 in early September.

UMW Oil & Gas Corp Bhd

By Hong Leong Investment Bank Research

Sell (maintained)

Target price: 77 sen

Given the current oversupply situation in the jack-up rigs market, HLIB Research expects the challenging outlook to continue through 2016. It expects UMW Oil & Gas’ second half financial year ending Dec 31, 2015 results to be weaker, given lower utilisation and charter rates.

The research house is also cautious on potential impairments on assets due to declining asset value and the weakening underlying cash flow.

UMW Oil & Gas currently has four rigs (Naga 1,4,5 and 6) operating in the third quarter while Naga 2,3 and 7 are off charter.

HLIB Research expects a weaker second half as Naga 5 and 6 would complete their contract by the end of the third quarter.

The company just took delivery of its Naga 8 in early September. Naga 8 is a premium jack-up rig and is capable of operating in water depth of up to 400 ft and drilling to a total depth of 30,000 ft.

The rig is currently under preparation for mobilisation to a potential client in South-East Asia.

HLIB Research said daily charter for jack-up rigs has fallen from US$150,000 per day in one year ago to US$90,000-US$100,000 currently compared to floater’s rate, which declined from US$500,000 a day to US$275,000 per day given the plunge in crude oil price.

At current rate of circa US$100,00 per day, earnings before interest, tax, depreciation and amortisation remained positive but in order to be profit and loss positive, it estimated that the utilisation rate needs to be as high as 85%. If taken into account the interest expense and principle repayment, cash flow is likely to be negative at the current average charter rate of US$100,000 per day.

HLIB Research has maintained its “sell” call with an unchanged target price of 77 sen, based on 11 times FY16 earnings per share.

UTILITIES SECTOR

By UOB-Kay Hian Research

Overweight

UOB-Kay Hian has maintained an “overweight” rating on the sector and there are potential re-rating catalysts for the industry.

Key re-rating catalysts for the sector include Tenaga Nasional Bhd (TNB) or independent power producer (IPPs) such as Malakoff Corp Bhd, YTL Power or 1Malaysia Development Bhd (1MDB) winning new power plant contracts from the Energy Commission. It added that first-generation IPPs getting short-term power purchase agreements (PPAs) to plug the temporary shortfall in generation capacity by 2017-18, and strong economic growth to drive better-than-expected demand for electricity would also be key re-rating catalysts for the industry.

Amid market volatility, UOB-Kay Hian said defensive plays in the utilities sector would include Malakoff (buy/target price: RM2) and Gas Malaysia (hold/target price: RM2.75), underpinned by good earnings visibility and high dividend payout mandates (70-100% of net profit).

The research house projected 2016 net dividend yield of 4% and 4.8% for Malakoff and Gas Malaysia respectively. For Gas Malaysia, the implementation of the Incentive Based Regulation (IBR) in 2016 – at 8.5% return on capital – will help to anchor GMB’s near term earnings. Last week, 1MDB reportedly shortlisted four parties, including TNB, for the sale of Edra Global Energy Bhd. At the moment, foreign bidders are restricted to owning no more than 49% of the plants and are generally encouraged to team with a local partner to own power plants.

UOB-Kay Hian said while the market appeared to be wary of foreign shareholding limits, it understood from the regulator that the limit can be increased with the Cabinet’s approval, national interest – which was perceived to be at stake – can be protected by specific terms and conditions set in the PPAs between a wholly-owned foreign entity and the regulator, to ensure no sudden threat to the stability of electricity supply.

The research house said based on previous media reports, TNB’s bid for Edra appears to be one of the lowest bids, suggesting that overseas bidders may be more interested in gaining a footprint in Malaysia and other emerging regions like Bangladesh, Egypt and Sri Lanka.

Nevertheless, with TNB being the only local bidder, sentiments may remain weak in the near term.

Pestech International Bhd

By Kenanga Research

Outperform (maintained)

Target price: RM6.49

Kenanga Research is maintaining an “outperform” call on power turnkey contractor Pestech International after the company won its first ever 500kW substation project from Tenaga as the latest award could open doors for the company to bid for similar projects in the region.

The research house said this is also the highest contract value, at RM134.4mil for the Yong Peng East substation, that the company has ever secured from Tenaga. So far, this is the first project secured in financial year ending June 30, 2016 (FY16), which is on track to meet our full-year assumptions of RM600mil order book replenishment,” it said.

The company’s total order book has been raised to RM857mil from RM723mil based on an end-June update, which will keep them busy for the next three years.

“We understand that it is looking to secure two major projects worth a total of RM700mil in FY16; this could almost double its order-book,” it said. The newly awarded Cambodia concession business offers a guaranteed recurring income over 25 years in contrast to the company’s existing business where contracts only last for two to three years.

This could easily contribute RM16mil to RM20mil per year to Pestech’s bottomline from 2020 onwards; a substantial impact given its net profit level of RM24.3mil in January to December 2014. Kenanga Research has also raised its order book replenishment assumptions by RM100mil each to RM700mil/RM800mil for FY16/FY17 and revenue assumption by RM20mil/RM30mil to RM500mil/RM600mil, respectively.

Thus, FY16/FY17 estimates are upgraded by 5%-10%. It said post earnings revision, the new price target is now RM6.49 per share, based on sum-of-parts from RM6.11 previously. This is based on an unchanged 16.6 times price-to-earnings on existing businesses and a free cash flow to the firm at a 7.2% discount rate on the Cambodian build-operate-transfer project.

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