UMW’s exit from O&G business a positive move
KUCHING: UMW Holdings Bhd’s (UMW) exit the oil and gas (O&G) industry via re-distribution of UMW Oil and Gas Corporation Bhd (UMWOG) shares to shareholders has been viewed positively by analysts as the business has been a key drag to the group’s performance.
In a filing to Bursa Malaysia, UMW announced that it would redistribute the entire 55.73 per cent ( 1,204.8 million shares) shareholding of UMW in UMWOG to its shareholders (PNB, EPF and other shareholders).
This will be done via dividend in specie at date to be determined later.
Post-exercise, UMW’s shareholders will own shares directly in UMWOG. After the demerger from UMW, UMWOG will undertake a consolidation exercise with Ekuinas’ Icon Offshore Bhd and Orkim Sdn Bhd.
In a report, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang) opined, “By separating its core businesses from its O&G-related business, we expect balance sheet to be leaner as gross gearing will fall from 0.91-folds (as at December 31, 2015) to 0.43-folds.
“There could be negative earnings impact from future impairments of its non- listed O&G business prior to disposal. Assuming the distribution of UMWOG by end-2017, we estimate UMW’s financial year of 2018 estimate (FY18E) earnings per share (EPS) will increase by 46 per cent to 27.8sen (FY18 PER of 16.60-folds) as it will no longer consolidate UMWOG’s projected loss.
“We are positive on this corporate exercise as it will allow UMW to refocus on its core businesses. However, we remain unexcited with automotive industry for the time being due to the current weak consumer sentiment and challenging operating environment.”
In a separate note, MIDF Amanah Investment Bank Bhd’s
By separating its core businesses from its O&Grelated business, we expect balance sheet to be leaner as gross gearing will fall from 0.91-folds (as at December 31, 2015) to 0.43-folds. Affin Hwang
research arm (MIDF Research) viewed the move as ‘very positive’ for UMW, given that the demerger could plug further leakage in UMW’s finances.
“UMWOG requires further injection of capital and postconsolidation with Icon and Orkim ( further details in this report), will undertake a rights issue to raise fresh capital for debt repayment – also partly to fund the acquisitions. UMW gets to avoid further cash leakage into UMWOG as it will dispose of its stake prior to this cash call,” it explained.
It also pointed out that the demerger from its O&G business could see UMW’s financial position improving significantly.
“UMWOG registered circa RM370 million net loss in FY15 and this was a big drag to UMW. UMW’s bottomline can easily swing into profits post-disposal of UMWOG. More importantly, balance sheet is expected to improve significantly - gearing is expected to more than halve while total borrowing will reduce by 67 per cent (based on FY15 statements),” it added.
UMW’s exit from UMWOG could also paves the way for more value creation at UMW, MIDF Research noted.
“O& G is a capital intensive business and following the sharp drop in revenues, has taken a massive toll on balance sheet of industry players, including UMWOG.
“The demerger, paves the way for more value creation at UMW (such as merger with another automotive group with common shareholders) as the disposal of UMWOG takes out a key risk within the group which might have hindered possible mergers and acquisitions (M&A) in the past, we think,” it explained.
Aside from that, MIDF Research said, the removal of a key drag to UMW’s earnings and balance sheet is likely to lead to a fresh round of valuation re-rating for UMW. The stock is currently trading at a 10 per cent discount to FY17F book value.
Despite the positive view on the demerger, the research team pointed out that there is a possibility that UMW could face asset impairment in the upcoming 4Q16 result which could drive down book value
Nevertheless, it said, “In this regard, we see trading opportunities arising for the short-term. The impact on net gearing and borrowing capacity from the resultant reduction in equity should not be too significant that is an increase in net gearing from 47 per cent to 49 per cent (pre-demerger of UMWOG).”
As at closing, UMW remained the top gainer of the day, with 17.64 million shares traded. It also saw its price gaining 9.96 per cent or RM0.46, to RM5.08 from its opening price at RM4.77.
Positive on its latest move, MIDF Research upgraded its call of UMW to ‘trading buy’ from ‘neutral’. On the other hand, Affin Hwang maintained a ‘sell’ call on the stock.